Everything You Need to Know Before Filing Your Taxes After a Big Life Change
When you first started paying your taxes, it was probably easy-peasy. Now, as an adult likely going through some pretty big life changes, your tax situation evolves too. Here, accountants and tax experts share what you need to know about filing this year, regardless if you got married, had a baby, or just took on a new side hustle.
First up, why do life events change our taxes?
Consider your Pinterest boards—you probably have some colorful inspiration for just about everything to remodeling a fixer-upper to decorating ideas for your youngest child’s room once he or she finally leaves the nest. But while you might not think beyond those goals, once they become a reality, the government wants a piece of your hard-earned pie. “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.
Why is it important to stay up to date?
Though it might be easier to log-in to TurboTax and let them do the song-and-dance for you, it might be a better idea to seek professional assistance if you had a major shift this year—from changing your name to opening up a rental business—because there might be laws or perks an accountant can share with you. If for no other reason, you want to make sure you aren’t penalized for your successes or losses. “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,” Travis A. Greaves, partner at Greaves Wu LLP, explains. “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.”
What to do if you got married this year:
Congrats! In addition to maybe changing your name, if you choose to do so, getting married changes your income and how you file your taxes. And though you may be so happy to be married, you might not get the same benefits that you’d expect. As Stranger explains, “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.” However, filing together, is not a foregone conclusion. Josh Zimmelman, owner of Westwood Tax & Consulting says to be strategic with your finances. “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 says. “But if one spouse has any financial problems, then filing separately will protect the other spouse from liability for the others’ debts or money issues.” Here’s how to put an end to arguments about money.
What to do if you had a baby this year:
As you start to grow your family, your purse strings and wallet will fit (way) tighter, and thus, your tax filing becomes complicated. There is a silver lining though, as Stranger notes there are many benefits to having a little one. The only caveat: They’re highly limited by income (aka you’ll need to make under a certain amount), and you’ll need to have proof of both your child and that the said child lives with you. “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.” What about tax perks from reproduction? They vary depending on your income and are applied for each child you have. Greaves explains this is considered a dependency exemption. “For 2016, a taxpayer may claim $4,050 for each child, though there is 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,” he explains.
What to do if you started your own business this year:
Depending on what type of company you opened, when you did it, and how you set it up, your tax responsibilities and required paperwork vary greatly. In the most basic of terms, if you are your own business, say a makeup artist, a writer, a performer, who incorporated into an LLC, your filing will closely resemble an individual tax return, according to Stranger. However, as Greaves says, when you create your company, you should do your research into what the financial responsibilities are for each. “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. As you would guess, the more complex filing happens when you have employees or when you create a company with a business partner. Kind of like being married (in more ways than just your tax accountant can tell), you must consider your individual taxes together and make sure you meet deadlines as a team, as the penalties for not filing returns or extensions on time are very high and can accumulate for up to a year. One other note? Make sure to talk to your account about the tax write-offs you’re entitled to as a business owner, Zimmelman says. From getting money back for your home office or buying furniture for a co-working space and your laptop, these can count toward your expenses and in the end, save you money as you grow your clients.
What to do if you started a new job:
Finally landed that dream career? Or at least, a full-time gig that covers your insurance and puts (takeout) food on the couch with Netflix? Go you! Relatively speaking, beginning at a new company is pretty simple in terms of taxes, especially if they’re covering both sides of taxes for you. “Every time you start a new job you will have to fill out a new W-4 form,” Zimmelman says. But if you job searched for a while before getting that acceptance letter? Zimmelman adds that you might be able to deduct some of the job-hunting expenses you paid for out-of-pocket, likes travel for interviews or employment agency fees. Another thing to keep in mind? If you relocated more than 50 miles to join this gig, you can deduct moving expenses as well.
What to do if you bought a home this year:
There’s nothing quite like that feeling when you sign on the dotted line, ensuring a mortgage payment for the next 30 years of your life (gulp). Though there is a great sense of pride, satisfaction, and yep, responsibility that comes with purchasing a home, when it comes to a tax benefit, you might need a little help to get the biggest benefit. As Zimmelman puts it, “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.” But don’t fork over that down payment without doing your research into what those deductions look like for you. “Buying a home often does not provide the tax advantages people expect from it,” Strangely says. Find out the 35 things every homeowner must know.
What to do if you bought a rental property:
If you have the extra cash and the time to dedicate (or again, the funds to hire someone) to take care and manage the property, Strangely says that a rental property can be a great investment that helps you write off many expenses, of course, with a limit. “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 how the activity is operated this income may be considered passive rental income or an active business,” she says. Abby Eiskenkraft, EA and the CEO of Choice Tax Solutions, Inc says if you’re going to go into renting as a business, consider opening up a separate account, only for the expenses tied to it, just to be extra safe. “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 notes.
What to do if you got a divorced this year:
Regardless of how you feel about the end of your marriage, when that April due date comes around, being prepared to face your divorce is important, not only emotionally but financially. The biggest difference when you get a divorce is how you file your taxes, since you’ll no longer be pooling your income together, but filing separately like you did pre-‘I do.’ Zimmelman says to make sure your tax document reflects the change in your withholding allowance. And depending on the terms of your divorce, this might mean that now you’re paying alimony, which according to Zimmelman, can be deductible, if it meets certain requirements. On the other hand, if you are receiving funds, you have to report that additional cash as taxable income. And what about kiddos? That’s when things get messy, yet again. Greaves says it depends on who has primary custody. “The parent deemed the custodial parent under the divorce decree may claim the child as a dependent. If the decree is silent as to the custodial parent, the parent who the child spends the most time with during the year may take dependency exemption, child tax credit or other related tax benefits,” he says.
What to do if you added a side hustle:
From freelance writing to consulting and many more jobs and careers that fall under the “freelance” umbrella, being your own boss or adding a side hustle means that you have to be extra careful with what you’re spending from this influx of extra dough. You better believe the government will put their hand out and want their fair share, come tax season. Normally, you’ll be issued a 1099 per client (for any invoices more than $600) and you’ll need to report all of that additional income. While a fun bonus, remember that it has perks and downfalls. “The good side of this is that you can take any business expenses against your income,” Stranger explains. “The bad side is that you may end up paying self-employment tax of 15.3 percent, which is both the employer and employee portions of social security and medicare.” And if your side hustle becomes more of a full-time gig, it’s time to ask your accountant about paying estimated quarterly taxes. Here’s how to make cash—quickly!
What to do if your kids went to college this year:
Empty nest syndrome? It’s not just your heart that might be aching from your kiddos leaving the nest. Greaves recommends that parents pay extra attention to tax incentives associated with college tuition and their related expenses. “The American Opportunity Tax Credit provides 100 percent tax credit for the first $2,000 spent on college, with an additional 25 percent credit on the next $2,000 (with a max of $2,500),” Greaves says. Typically it’s only applicable to undergraduate students. (Find out the 10 things every parent needs to know about college.) It’s important to capitalize on the perks now, because once your children begin paying their own taxes, the tax benefits of becoming a parent come to a swift stop. “If your child is a full-time student and you’re still providing over 50 percent of their financial support, you can continue to claim them as a dependent until they’re 24. When your child is no longer able to be claimed as your dependent, you will have to adjust your withholding to reflect this,” Zimmelman says.