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29 Sep Life Changes That Can Impact Your Taxes: What You Need to Know Before Filing

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As life changes, so do your tax responsibilities. Throughout the year, certain events can significantly impact how much you owe in taxes or what you may be eligible to deduct. Being aware of these events and understanding how they influence your tax situation can help you avoid surprises and maximize your tax savings. Here are some of the most important life changes to consider when preparing for tax season.

This article describes a few important life changes and how they can affect your taxes.

 

1. Getting Married or Divorced

Marriage and divorce are two of the biggest life events that can alter your tax filing status. When you get married, you may have the option to file jointly with your spouse, which often results in lower tax rates and access to higher deduction limits. However, your combined income could also push you into a higher tax bracket.

If you’ve divorced this year, you’ll need to file as single or head of household (if you qualify). Additionally, alimony payments for divorces finalized before 2019 are tax-deductible for the payer and taxable income for the recipient. For divorces finalized after 2018, alimony is neither deductible nor taxable.

Key Tax Considerations:

  • Change your filing status to married filing jointly, married filing separately, or single depending on your circumstances.
  • Adjust your tax withholding after marriage or divorced to avoid a year-end surprise.
  • Update your name with the Social Security Administration if you’ve legally changed it.
  • Look at the current IRS tax table to do a calculation of your taxes, and see how that compares to what is being withheld, plus what you have paid to the IRS through estimated payments.

 

2. Having a Child or Adopting

Welcoming a child into your family opens up a variety of tax benefits. You may now be eligible for the Child Tax Credit, which can reduce your tax liability by up to $2,000 per qualifying child under 17 (phased out if your income is above $400K MFJ or $200K SF). You can also claim the Child and Dependent Care Credit if you pay for daycare or other childcare services while you work. Summer camps and afterschool programs are included for this credit.

Adopting a child can also qualify you for the Adoption Tax Credit, which helps offset adoption-related expenses like attorney fees, court costs, and travel.

Key Tax Considerations:

  • Claim the Child Tax Credit and the Child and Dependent Care Credit.
  • Update your withholding to reflect your new dependent(s).
  • Keep records of your childcare expenses, and obtain a statement from each provider (including summer camps and afterschool programs) that includes their Tax ID.
  • Keep records of adoption-related expenses for the Adoption Tax Credit.

 

3. Buying or Selling a Home

If you sold a home this year, you may be required to pay capital gains taxes on the sale.  This applies if the home is a rental property that you have not lived in.  If you have lived in the home for 2 out of 5 years, you may qualify for the Capital Gains Tax Exclusion (described below).  Capital gains taxes are calculated, in brief, as follows: Proceeds from Sale of Home – Cost Basis of Home (purchase + improvements – depreciation) – Costs of Sale

In summary, for the Capital Gains Exclusion (S121), the IRS allows you to exclude up to $250,000 ($500,000 for married couples) in capital gains from the sale of your primary residence if you’ve owned and lived in the home for at least two of the last five years.

Key Tax Considerations:

  • Understand the capital gains exclusion on home sales, and its rules for occupancy.
  • Keep records of home improvements, as they can increase your cost basis and reduce capital gains taxes.

 

4. Job Change or Unemployment

Switching jobs or experiencing a period of unemployment can impact your tax situation in several ways. A higher salary might bump you into a new tax bracket, while unemployment benefits are considered taxable income. If you’ve received severance pay or a payout for unused vacation days, those are also taxable.

Additionally, if you had to move for a new job and it was a military move, you may be able to deduct moving expenses.

Key Tax Considerations:

  • Report any unemployment benefits you received as taxable income.
  • Adjust your W-4 form at your new job to ensure the right amount of taxes are withheld.
  • Deduct eligible moving costs if applicable.

 

5. Starting a Business or Becoming Self-Employed

Starting a new business or transitioning to self-employment means significant changes to your tax obligations and requirements for documentation and tracking financial transactions.

You’ll now be responsible for paying self-employment taxes, which cover Social Security and Medicare. You may also be eligible to deduct business-related expenses. Examples of these costs include running your business, supplies, home office costs, internet service, and equipment.

Tracking your income and expenses meticulously is critical. Failing to pay estimated taxes quarterly could result in penalties, so be sure to plan ahead.

Key Tax Considerations:

  • Pay self-employment tax and make estimated quarterly tax payments.
  • Invest in a bookkeeping system to track your income and expenses.
  • Deduct eligible business expenses, including home office and travel costs.
  • Consider forming an LLC or other legal entity for legal protection and tax advantages.

 

6. Medical Expenses or Health Changes

If you’ve faced significant medical expenses this year, you may be able to deduct them, but only if they exceed 7.5% of your adjusted gross income (AGI) and if you itemize deductions. This includes out-of-pocket costs for doctor visits, surgeries, prescription drugs, and health insurance premiums (if you’re self-employed).

Changes to your health can also impact your taxes. For instance, if you’ve started receiving Social Security Disability Income (SSDI), part of it may be taxable depending on your total income.

Key Tax Considerations:

  • Keep records of all medical expenses to determine if you can deduct them.
  • Understand how SSDI or other disability benefits impact your taxable income.
  • Consider contributing to a Health Savings Account (HSA) or Flexible Spending Account (FSA) for additional tax savings if it is available to you.

 

7. Education-Related Changes

Whether you’ve gone back to school or are helping a child pay for college, education expenses can provide valuable tax benefits. The American Opportunity Credit allows for a credit of up to $2,500 per student for tuition, books, and other educational expenses. The Lifetime Learning Credit offers up to $2,000 for courses that improve your job skills.

If you’ve paid off student loans, the interest paid may be deductible up to $2,500, even if you don’t itemize your deductions.

Note that these credits and deductions have income limits.  If you are planning on claiming these benefits on your tax return, make sure you are within these limits.

Key Tax Considerations:

  • Claim education tax credits like the American Opportunity Credit or Lifetime Learning Credit, if you qualify.
  • If you do not qualify for the education credits, consider if your child may qualify and if they would benefit from claiming them.
  • Deduct student loan interest if you qualify.
  • Save receipts and records of educational expenses.

 

8. Inheritance or Large Gifts

Receiving an inheritance or large gift can affect your tax situation, though recipients generally don’t pay taxes on inherited property. However, you may owe taxes if the estate exceeds the federal estate tax threshold ($12.92 million in 2024). Additionally, if you’ve received or given gifts exceeding $17,000 in value, you’ll need to file a gift tax return to use your exclusion.

Key Tax Considerations:

  • Understand the tax implications of receiving an inheritance.
  • File a gift tax return if applicable, but keep in mind that the giver usually pays the gift tax.

 

Life events like marriage, buying a home, or starting a business can create new tax opportunities and responsibilities. By staying informed and taking proactive steps, you can ensure that you’re prepared for any tax changes resulting from these events. When in doubt, it’s always a good idea to consult a tax professional to ensure you’re making the most of your situation.

 

Disclaimer: The information provided in this blog article is for general informational purposes only and should not be considered professional advice. While we strive to provide accurate and up-to-date content, tax laws, financial regulations, and accounting practices may vary depending on individual circumstances, and they are subject to change. Before making any financial decisions or taking action, we strongly recommend consulting via a formal engagement with a certified public accountant (CPA) or qualified financial advisor to address your specific needs and ensure compliance with current tax regulations. This article does not establish a client relationship.