You probably share news of major life events like marriage, the birth of a child, or a promotion with your closest friends and family. But there's another interested party you have to keep in the loop about your life changes: the government.
Major changes, like the ones described above, have significant effects on your tax bill, for better or worse. You have to play by the government's rules no matter what, so it helps to understand what these are to avoid a shock come tax time. Here's how five major life events can affect your taxes.
Marriage is usually a good thing for taxes. Couples who file a joint return get a standard deduction that's twice as high as the standard deduction for single filers: $24,400 versus $12,200 in the 2019 tax year. You can also earn a lot more money before you move up to the next tax bracket. The downside to this filing status is that the IRS holds both of you responsible if your taxes are incorrect, so if your spouse is hiding income from the government, the IRS can come after you both.
Married couples can file separately, but this isn't usually smart because you cannot claim some tax credits when you file separately.
It can make sense if you don't want to be held responsible for the accuracy of your spouse's tax return. Or if one of you has a student loan with a payment plan that depends on adjusted gross income (AGI), filing separately may help keep the person's payments low, while filing jointly could raise monthly payment requirements significantly.
It's best to explore both options. If an accountant is doing your taxes or if you're using tax filing software, the accountant or software should check both filing statuses to see which would give you the lower tax burden.
Divorce is usually challenging from a personal and tax perspective. If you're divorced by Dec. 31 of the tax year you're filing for, you must file as single, which brings lower standard deductions and less favorable tax brackets, unless you have primary custody of a child, in which case you can file as head of household.
Heads of household get a $18,350 standard deduction for the 2019 tax year, which is in between what married couples filing jointly and single filers get. For couples with joint custody of children, the parent who has the children the most days of the year can claim as head of household, while the other parent must file as single unless remarried.
You cannot write off child support or alimony payments that you paid to your ex. There is an exception for alimony payments if your divorce was finalized before 2019. If you were receiving alimony and you were divorced before 2019, you must claim this as income on your taxes, though child support you received does not count as earned income.
3. The birth of a child
Having a child brings a lot more expenses, but it can also open the door to some valuable tax credits. The Child Tax Credit is one of the most popular. It gives you up to $2,000 per qualifying child for the 2019 tax year. To qualify, children must meet the following criteria:
- They are under 18 by the end of the tax year.
- They are biological, adopted, step, or foster children, or siblings, half-siblings, or step-siblings, or a descendant of any of these individuals.
- They must not have provided half or more of their own support during the year.
- They must be claimed as dependents on your tax return.
- They must be U.S. citizens or resident aliens.
- They must have lived with you for at least half the year.
For the 2019 tax year, $1,400 of that $2,000 is refundable, which means that it can reduce your tax bill below zero. If this happens, any excess money is returned to you as a refund. Not everyone is entitled to the full $2,000. The credit shrinks for single filers with an AGI exceeding $200,000 and for married couples filing jointly with an AGI exceeding $400,000. And if you earn more than $240,000 as a single adult or $440,000 as a married couple, you cannot claim this credit at all.
Here are other tax breaks relating to children that you might qualify for:
- Adoption Tax Credit
- Earned Income Tax Credit (EITC), which increases based on how many qualifying children you have
- Contributions to 529 plans
- Student loan interest deduction
- American Opportunity Tax Credit
- Lifetime Learning Credit
- Child and Dependent Care Tax Credit
When you claim your children as dependents on the W-4 you submit to your employer, this will also reduce how much the government withholds from each of your paychecks, so you can keep more of your money each month. Submit a new W-4 to your employer following the birth of your child if you haven't already.
4. A death in the family
If your spouse dies, this can affect your filing status for the next few years. You can still file as married, filing jointly, for the year your spouse dies. The next two years, you can use qualifying widow(er) status, assuming you don't remarry. Qualifying widow(er) status gives you the same standard deduction and tax brackets as married couples filing jointly even though your spouse is deceased.
When a family member dies, someone still has to file that person's taxes for the final year of life. Usually, the executor of the deceased's estate handles this. But even if that's not you, your loved one's death could still affect your taxes if you're to inherit any of the deceased's retirement accounts. Usually, inheritance is not subject to income tax, but the government is allowed to tax money in inherited retirement accounts, unless you were the deceased's spouse and you roll over the money into your own retirement account, in which case you won't owe taxes until you withdraw the money in retirement. You also won't owe taxes on Roth retirement accounts you inherit because the deceased already paid taxes on those funds in the year the contribution was made.
You might have to pay estate or inheritance taxes, depending on where you live. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania currently levy inheritance taxes, though the rules vary by state.
5. A promotion
Promotions bring more money, which is great news, but they can also mean a larger tax bill. If a promotion pushes you into a higher tax bracket, you'll lose more of your income to the government, but there are ways around this.
Stash money in tax-deferred retirement savings or in a health savings account (HSA). Contributions to these accounts will reduce your taxable income and keep you in your lower tax bracket while still enabling you to reap the benefits of your new, larger income.
Taxes are a little different every year because the government is always updating the rules, but they're especially different when any of the events listed above happen to you. Most tax filing software should help you through these changes, or you can always talk to an accountant.