New baby or house? How major life changes affect your taxes
At a glance
- Specific life changing events could change your tax filing status, tax bracket, or eligibility for certain credits and deductions.
- Getting married may change your filing status, eligibility for tax credits, and how you report income.
- Having a new baby can make you eligible for valuable tax benefits like the Additional Child Tax Credit, the Earned Income Credit, or the Adoption Tax Credit.
- Losing your job may result in a lower tax bracket or eligibility for specific tax credits.
- Retiring can affect your taxable income, especially if you begin receiving Social Security benefits, pensions, or distributions from retirement accounts like IRAs or 401(k)s.
Getting married? Having a baby? Buying a house? These life changing events are more than just milestone occasions; they have major tax implications.
Any time you experience a major life event, you need to consider the tax implications. Changes in your situation can mean a difference in your tax bill. Here are five life events that can impact your tax return:
Relationship status
- When you marry, it will change your filing status:
- You can file jointly: This can provide you with an advantage on your taxes, since it could lead to a lower tax bracket than when you were single. Additionally, filing jointly while married may allow you to claim certain credits and deductions not available to married couples filing separately.
- You can file as Married Filing Separately: Another option as a married couple is to file separately. Weigh the pros and cons of Married Filing Jointly vs. Separately.
- Be aware of the Head of Household filing status: If you are considered unmarried at year’s end for tax purposes and support a dependent for more than half of the year, you can choose this option. You’ll need to carefully evaluate your new situation to determine how your tax bill will change.
- Another big change is divorce: Now that you’re filing as Single, you’ll need to make sure that dependents, credits, and deductions are properly divided between you and your former spouse.
File with H&R Block to get your max refund
New baby
You can take advantage of dependent related tax breaks as a newly minted parent. You can claim your child as a dependent. (Learn about claiming dependents on taxes.) And if you meet certain requirements including income limits, your child may make you eligible for the Child Tax Credit. You might also qualify for a higher amount of the Earned Income Credit (EIC). This is a credit designed to help low- and middle- income earners reduce the burden of child rearing. You must meet qualifying children and income requirements for the EIC.
If you adopted your new baby, you can also claim the Adoption Tax Credit. Make sure you have the qualifying child’s Social Security number.
Buying your first home
One thing you may notice when you buy a home is the deduction for mortgage interest resulted in a tax refund. If you itemize, you can claim the mortgage interest you pay, as well as property taxes (subject to amount limitations) and PMI premiums.
If you refinance, look into how you can deduct mortgage points paid for this effort.
Losing your job
With lower income, you might find yourself in a lower tax bracket, as well as eligible for certain credits and deductions. However, you may be taxed on your unemployment benefits, as it counts as income. You might be surprised to owe taxes—even if you have spent a good portion of the year unemployed.
Retirement
As you transition into retirement, there are a number of tax considerations to be aware of.
- If you retire early and tap into your retirement account before age 59 ½, you may be subject to an early withdrawal penalty.
- As you begin taking distributions from your retirement account, it can affect your tax bill. Distributions from Traditional IRAs and 401(k)s are considered ordinary income, so you will pay taxes. (This is on top of the IRS charge for early withdrawal, if applicable.)
- Earnings from Roth accounts aren’t taxed when you withdraw as long as you wait five years after you made the initial Roth contribution and are older than age 59 1/2. As a result, many retirees roll their Traditional retirement accounts into Roth accounts. When you do that, you have to pay your taxes all at once on the amount you move over, since it is considered a distribution.
- Don’t forget about Required Minimum Distributions (RMDs) that come when you turn 73. For every qualified, tax-advantaged account except a Roth IRA, you have to take a certain distribution each year. Once again, rolling your money into a Roth IRA can help you avoid this requirement, but you will take a tax hit.
Get tax help through life changes
No matter what major life change you are experiencing, there is likely to be a tax consequence. If you aren’t sure how your next milestone will affect your situation, get help.
Whether you choose to file with a tax pro or file with H&R Block Online, you can rest assured that we’ll get you the biggest refund possible.
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