Generally, it’s rare for people to think about their taxes when major life changes occur, and understandably so. Paperwork is the farthest thing from the minds of those who just got married, had a baby, or bought their first home. Though your tax filing status or the amount of money to withhold on your paychecks aren’t your top priorities when these changes occur, it’s important to round back to your taxes once the dust begins to settle.
This month, we’ll review the top three major life changes that require updates to your tax filing and outline the most important steps you should take before tax season.
1. Update your last name with the Social Security Administration (SSA).
Once you’ve unpacked the wedding presents and sent off your thank-you cards, be sure to let the SSA know if you decided to change your last name to match your spouse’s. The name on your tax return must match your name on file with the SSA. If it doesn’t, your tax return may get rejected – delaying your return until the confusion is rectified. If the tax deadline is nearly here and you’re concerned the name change may not be updated in time, simply file a joint return under the original name that the SSA has recorded. Then, update your name with the SSA after your tax return (or bill) arrives.
2. Update your paycheck withholding.
Sit down with your new spouse, your budget, and a W-4. Determine which tax withholding allowances you qualify for, and who will claim which ones. If you are uncertain where to start, it would make sense to speak with a tax professional who can assist you with the calculations to make sure your federal and state tax withholdings will not result in a large, unexpected bill at tax time. Then, take the W-4 to the person in charge of payroll at work to communicate these changes so they can update your information and adjust your payroll withholding accordingly.
Having a Child
The famous tax benefits of having a child may not make up for the sleepless nights, but they certainly help with expenses. In fact, there are tax credits you are eligible to claim beginning in the year that you have the child. Tax credits directly reduce the amount of money on your tax bill, dollar for dollar. Generally, you can claim your child as a dependent which allows you to claim the Child Tax Credit, which may reduce your taxes by as much as $2,000 per child. You will be able to claim this credit as long as the child is less than 17 years old and your dependent. Depending on your situation, other potential credits that you may be eligible for include the Child and Dependent Care Credit and the Earned Income Tax Credit. If you are planning to utilize the services of a daycare provider, you should ask your employer if they have a flexible spending account plan that you can utilize to help you pay for some of your daycare expenses.
If you’re adopting a child, there’s a special tax credit specifically for you. Make sure you keep track of adoption-related expenditures and documentation to support the credit claimed. If you’re having a newborn, be sure to ask the hospital for a Social Security card when you apply for the birth certificate. Otherwise, if you’re claiming a child for the first time, the SSA will require you to file Form SS-5. This form proves the age, identity, and citizenship of the child.
Buying a house
Buying a house is a huge step. Most homebuyers take out a mortgage secured by the house and make monthly payments to the mortgage company instead of paying rent. The payments are split between interest and principal. The amount of principal reduces the loan balance due and allows you to build equity in your home. There are also several tax breaks incentivizing a home purchase, some of which are significant enough that they may turn you into an itemizer of deductions instead of taking the standard deduction. Some of the largest deductions include:
- Mortgage Interest Paid
- Local Real Estate Taxes Paid
- Points – the percentage of your home loan you pay to the lender in order to secure the interest rate on your loan
To best leverage the deductions and tax breaks available to you, consult with a tax expert.
While this post is by no means an all-encompassing list of tax breaks, these three major life changes come with some significant benefits. If you’ve made some big changes and want to make sure you’re taking advantage of every deduction or benefit possible, reach out to us today. We’ll start with a conversation, then suggest strategies for your unique situation.