Do life events change our taxes?
For every action, there’s a reaction. You might not think of any connection between your life goals and taxes, but, trust me, everything you do and change in your life reflects in the way the government taxes you.
“Taxes are a reflection of our lives. As life becomes more complex so does one’s tax situation. When you’re young, the only tax matters are relating to simple wage income and educational expenditures. But as life progresses family and business lives filled with various investments tend to create more complex tax pictures,” explains Crystal Stranger, the president of 1st Tax Inc.
The importance of staying up to date
If you’ve had a major change this year, such as changing your name or opening a new business, you might want to contact a professional advisor, let’s say an accountant, and ask for professional insight. That’s because they might tell you about certain perks and laws that you are unaware of. You wouldn’t want to get penalized for your successes or losses, would you?
“From buying a house to marriage to having a child, the tax code is littered with exemptions, deductions, and credits for taxpayers. The hard part for taxpayers is knowing how and when to claim these benefits. In addition, the tax code may impose new filing requirements based on a change in one’s life. For example, if a U.S. citizen moves to Italy for six months and opens a bank account, that person may need to file additional tax forms,” says Travis A. Greaves, partner at Greaves Wu LLP. “Therefore, it’s important to have a tax adviser that you trust and that will make you aware of the tax impact of your life changes.”
In case you got married this year…
First of all, kudos! Changing your name (particularly if you’re a woman and want to take on your husband’s name) is not the only thing that changes after getting married. Your income, the way you file your taxes from now on and your future benefits will also change because of your marital status.
“The biggest issue with getting married is that two-income families often wind up losing various tax advantages because of their higher income. Congress tried to remove the ‘marriage penalty’ by doubling the standard deduction of joint filers to equal twice that of single filers, but tax rates are just one part of the picture. Many of the tax items that reduce adjusted gross income have phase-outs that do not benefit married couples,” explains Stranger.
But don’t leave out the option of filing together just yet. According to Josh Zimmelman, owner of Westwood Tax & Consulting, “if you file jointly with your spouse, you only have to file one form [Form 1040] and don’t need to worry about which income or expenses belong to which spouse”. He warns that “if one spouse has any financial problems, then filing separately will protect the other spouse from liability for the others’ debts or money issues.”
In case you had a baby this year…
Expanding your family means increasing your expenses and consequently, complicating your tax filing. But, hey, that’s life, nothing is simple, much less taxes! However, there’s also some good news, if we can call it that way. Provided that you earn under a certain amount and bring evidence that your child or children live with you, you receive certain benefits.
“One thing to note is that there are due diligence requirements for tax preparers in this area now, so be prepared to bring proof your child lives with you to your tax appointment,” Stranger explains. “The types of documentation that often works is school and daycare records, or medical records and prescription receipts.” In terms of tax perks from reproduction, these might vary based on your income and apply for each child you have. “For 2016, a taxpayer may claim $4,050 for each child, though there is a phase-out if your income exceeds a certain amount. Parents may also claim a $1,000 child tax credit for every year until the child turns 17. It’s worth noting that this is a credit, not a deduction, so it reduces your final tax bill by $1,000 per child. Like the dependency exemption, the credit phases out when a taxpayer’s adjusted gross income exceeds a certain amount. The phase-out amount is lower than the amount for the dependency exemption,” Greaves explains.
In case you started a new business this year…
The type of company you opened, when you did it, and how you set it up, dictate your future tax responsibilities and related paperwork. In other words, if you are your own business, such as a performer or hairstylist who incorporated into an LLC, you will fill in a form that’s like an individual tax return. Greaves recommends doing some research and determining what are your financial responsibilities.
“For tax purposes, a business can either be a sole proprietorship, C corporation, S corporation, or partnership. Each of these comes with specific tax implications. New business owners should consider the multitude of tax incentives offered to them from deductions for business expenses to tax credits for hiring certain employees. If a business intends to hire employees, there are employment tax withholding procedures that the business should put in place,” he says.
The filling process becomes more complex if you have employees or start a company with a business partner. Consider it a “marriage” with financial responsibilities that include filing individual taxes together, meeting deadlines as a team, penalties for not filing returns or extensions on time.
One other thing to keep in mind when opening your own business is that, as a business owner, you are entitled to some pretty consistent tax deductions. From furniture for your home office or a co-working space to office equipment, these can all count toward your expenses and save you money as you expand your business.
In case you started a new job…
Finally got the job you’ve always dreamed of or, at least, a nice, stable job that covers your insurance and allows you to just “Netflix and chill”? Congrats! Relatively speaking, starting a new job is not that complicated in terms of taxes. “Every time you start a new job you will have to fill out a new W-4 form,” Zimmelman says.
What happens if you’ve looked for a job for quite some time before finally finding one and getting hired? According to Zimmelman, you might be able to deduct some of the out-of-pocket costs, like travel for interviews or employment agency fees. Another thing to take into account? If your new job required you to move more than 50 miles away, moving expenses can also be deducted.
In case you bought a home this year…
Buying a house is an important event in anyone’s life. Apart from the sense of satisfaction and responsibilities that come with the purchase, there are also certain tax-related aspects you might need help in deciphering, in order to get the biggest benefits.
“You can deduct your mortgage interest and any state or local property taxes on your federal tax return. You might also be able to claim certain home-related credits, such as energy-efficiency credits,” says Zimmelman. But don’t make that down payment without knowing what those deductions actually look like for you. “Buying a home often does not provide the tax advantages people expect from it,” Strangely says.
In case you bought a rental property…
If you succeeded in saving some money to invest in a rental property and have the time to manage it, Strangely states it can be a great investment and can help you deduct many of your expenses.
“Unlike with a primary residence, all expenses are deductible, even auto expenses to drive to the property. Rental properties are not as simple as they used to be though. Short-term rentals on sites like AirBnb are very popular right now, and depending on how the activity is operated this income may be considered passive rental income or an active business,” she says.
According to Abby Eiskenkraft, EA and the CEO of Choice Tax Solutions, Inc, if you’re thinking of turning renting into a business, consider opening up a separate account for the expenses related to it. “You can use this bank account to deposit the rent and pay the expenses from. Keep receipts for everything, to prove that any expenses are truly for the rental property and are a valid deduction for you, as opposed to your personal property,” she adds.