Major life changes and taxes

January 17, 2018 : Annelise Wiens

Major life changes, both good and bad, usually mean contacting the people who matter the most to share the news. A tax professional might not rank on that list, but Catherine Martin, senior tax research analyst at The Tax Institute at H&R Block, says sometimes they should.

“Life changes usually mean tax changes, so when something significant happens in your life, you should talk to a tax professional to make sure you handle the new situation properly and get all the tax benefits you’re entitled to,” Martin said.

Here are just a few major life changes and the tax return impact they could have.

Going to college

Going to, and paying for, college is a big life and tax change for students and their parents. An education may be expensive, but it also comes with some unique tax benefits to help alleviate the pressure during those years of growing student debt and then repaying student loans.

“So many taxpayers miss tax benefits for education because of their complexity. Depending on the kind of academic program, what year you’re in, income and other factors, you may qualify for several different tax benefits so it’s important to utilize the one that maximizes tax savings,” Martin said.

One of the most advantageous college tax benefits is the American opportunity credit, which maxes out at $2,500. It is limited to students in their first four years of undergraduate studies. The lifetime learning credit is worth up to $2,000 and is more widely available to graduate students or people taking courses to improve their job skills.

Once students or graduates begin repaying their loans, they can start deducting the interest they pay, up to $2,500, even if they don’t itemize their deductions.

Starting a business

As far as life and tax changes go, starting a business, even one that’s part of the sharing or gig economy, has one of the biggest impacts.

“There are so many changes that come with starting a business or becoming self-employed. You’re going to get different information-reporting documents. You’ll file a different form with your tax return. You’ll pay estimated quarterly taxes instead of having tax withheld from a paycheck. You’ll have more generous rules for deducting expenses. You can also get tax benefits to help pay for health insurance,” Martin said.

Losing a job

Losing a job doesn’t just mean losing income. If losing a job also means losing health care, it could lead to a penalty on the tax return.

“Losing health insurance due to the loss of a job triggers a special enrollment period with the health insurance marketplace, which you should take advantage of to avoid a penalty on your tax return,” Martin said. “However, you may also qualify for an exemption to the penalty, which you will either need to claim on your tax return or apply for with the marketplace itself.”

Also, if a taxpayer receives unemployment benefits or severance, those are taxable. Taxpayers can opt to have taxes withheld so they don’t underpay their taxes and face an underpayment penalty, or they might want to adjust a spouse’s withholding or make estimated payments.

Buying or selling a house

Taxes can change quite a bit after buying or selling a home. Owning a home is often the key that unlocks itemization because homeowners may deduct typically larger expenses like mortgage interest and real estate taxes. Taxpayers only benefit from itemizing if their itemized deductions are bigger than the standard deduction, which will almost double in 2018.

“While other common itemized deductions will be capped at $10,000 starting in tax year 2018, mortgage interest will be fully deductible for qualifying mortgages,” said Martin. “Once you can itemize, you can take advantage of deducting other expenses like charitable donations.”

Itemizing isn’t the only thing homeowners need to be aware of; they also need to keep records of and track their expenses. This will play an important part in reducing or eliminating a tax bill when they sell their house. Whether or not the seller qualifies for the home sale exclusion, they can minimize any tax bill by showing they gained less from the sale of the house by using their expenses that went toward improving the house to increase their basis in the house and decrease their gain.

Getting married

After getting married, taxes change as the couple gets a new tax filing status. The married filing jointly status has more favorable tax rates and qualifies the taxpayers for more tax benefits than if they were to use the married filing separately status. However, there could be situations when taxpayers are better off filing separately.

In some cases, couples might find their situation hands them a “marriage penalty” on their tax return. A marriage penalty exists when two individuals filing a joint return pay more tax than the sum of their individual tax liabilities calculated as if they were filing as single taxpayers. One reason this occurs is because the married filing jointly income tax brackets and thresholds for tax benefits are not always equal to twice the single income tax bracket and tax benefit thresholds.

“Even if you find yourself facing a marriage penalty, you cannot file as single. You have to use one of the married filing statuses unless you are considered unmarried, which is when you are legally separated or divorced by the end of the year,” Martin said.

The new couple will also want to review any W-4s they filed with their employers to make sure the right amount is being withheld from their taxes after getting married. In some instances, married couples filing jointly can together earn twice as much money as a single individual and remain in the same tax bracket.

Having a child

In terms of life changes and taxes, having a child will likely have a sizable tax impact. Once a taxpayer has a child, they may qualify for a child tax credit of $1,000 in 2017 and $2,000 in 2018. In addition, they can receive a child care credit for their child care expenses or pay these expenses using pre-tax dollars in a dependent care flexible spending account.

“It’s easier for parents to qualify for the earned income tax credit because the income limitation more than doubles once you have a baby,” Martin said. “This credit can be worth more than $6,000, making it very significant for eligible taxpayers. However, eligibility can vary year-to-year because it is tied to income, filing status and size of family, so it’s important to check in every year so you don’t miss out.”

Aging and retiring

Starting at 65, taxpayers could become eligible for an increased standard deduction. At 70 ½, a taxpayer may be required to start taking minimum distributions. Once retired, taxpayers may have a different type of income, like Social Security or Roth IRA distributions, which could be taxed differently than regular wages. Some may not automatically withhold taxes, although taxpayers can opt to have taxes withheld.

“You will want to make sure to update your withholdings or estimated payments. If you don’t cover your tax liability, you could face underpayment penalties,” Martin said.

Dying

Death is the final major life change that impacts taxes. A tax return needs to be filed for a deceased taxpayer in the year they die if they would otherwise be required to file. Additionally, gift and estate taxes may apply to their heirs.

“Choosing a tax professional means choosing somebody who is going to be there to advise you during all of life’s ups and downs, including highs like the birth of your first child and lows like the death of a parent,” Martin said. “You want to make sure you choose the right person to guide you through those experiences, not just in terms of tax expertise, but someone you can trust.”

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Annelise Wiens

Annelise Wiens

Editor and Producer

As the newsroom editor, Annelise Wiens is interested in more than just tax and industry news, but the stories of H&R Block's 80,000 associates, their communities and H&R Block's world headquarters in Kansas City, Missouri. Wiens joined H&R Block in 2014 from a public relations agency, where she worked with clients in the financial services industry. Before that, she worked as a communicator for a senior member of the United States House of Representatives. She graduated from Biola University in La Mirada, CA with a bachelor's degree in history.

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