David Bowie sang "don't want to be a richer man" but not many of us agree. Life changes can have dramatic effects on your tax return. From getting married to having a baby or even getting divorced, use our tips to help keep more of your money in your pocket.
Tax time is another reminder that you are no longer single. Married taxpayers cannot use the "Single" filing status, they must use either "Married Filing Jointly" or "Married Filing separately." Keep in mind that the filing status "Married Filing Jointly" offers the greatest standard deduction, the lowest overall tax rate, and entitles you to many income related tax benefits even with a higher income.
Dependents have the greatest single impact on a tax return; they can drive a filing status, increase the exemption amount, and make you eligible for different credits and deductions.
Baby makes ... cents! Congratulations, if your child is born before January 1, 2015, you may be able to claim a variety of tax deductions and credits. First is the new exemption for your child. A dependent exemption is the same amount as your personal exemption and reduces your taxable income immediately. Second, most dependent children under the age of 17 qualify you for the $1,000 child tax credit. In addition, you may find you are eligible for a credit for your child care expenses if you and your spouse work. Finally, the Earned Income Tax Credit and Additional Child Tax Credit may be available for lower income taxpayers.
If you are a single parent, a dependent child can qualify you for the more beneficial "Head of Household" filing status, which offers the second only to the married filing joint standard deduction amount and overall low tax rates.
Money for Nothing
It is a bittersweet moment when your children get their first job and even more so if your child is making a decent amount of money and spending it on himself or saving it. That is because the rules for claiming a dependent require the dependent not to pay more than half the cost of supporting themselves. That's right; we are telling you to let your child keep their money so you can continue to claim them as a dependent!
Another tax hit occurs when your children are in high school, which ironically seems to correspond to when they cost you the most - all those clothes and all that food. This time it is the loss of the $1,000 Child Tax Credit. Unless you are lucky enough to have a super smart child, or one born late enough in the year, you will lose this credit before your child graduates when they turn 17.
Once your children go off to college, there are some great tax savings to help offset the expenses. The first two years of college allow the greatest tax benefit using the American Opportunity credit of up to $2,500. The remaining years, while they are finishing college, there is a smaller credit. Though your child is taking these final steps towards independence, you can still claim them as a dependent, at least until they graduate and, fingers crossed, become fully independent or turn 24. Beware of their final year in college and not just because this is the year you may be welcoming them back home. This is the year you will probably lose the tax benefit of having a dependent child. It doesn't necessarily coincide with providing less money for your child, it is just the tax rules, which state your child is your dependent as long as they are under 19 or in school full-time during the year and under 24.
Your children aren't the only ones that can benefit from an education related credit, the Lifetime Learning Credit can help pay for undergraduate, graduate and professional degree courses regardless of the number of years in the program.
Unfortunately, some marriages end in divorce. When this happens your tax return can be affected in many ways. If there is an income disparity between the spouses, the one with the lowest income may end up owing taxes the first year of filing separately and the spouse with the lower income may end up with a much larger refund than expected. The tax return difference is even greater when there are children involved. Since only one taxpayer can claim a dependent exemption for an individual, the IRS allows the taxpayer the child lives with for more than half the year to be an eligible dependent for that taxpayer.
Many life changes can decrease our overall tax burden with specific tax credits. Some of these credits are easy to take advantage of but others are more complex, such as the Earned Income Tax Credit, and you may want to seek professional assistance to ensure you are taking advantage of appropriate credits correctly.
Above, I highlighted just a few life changes and you can see the potential impact on your tax return. Besides reviewing tax law changes and late tax legislation, it is a best practice to look over your year and reflect on life changes to determine the impact on your tax return. Actually, summer is a particularly good time to take a moment to reflect and put some notes in your tax file, or better your receipt app, before life gets hectic with back to school and then the holidays. This will make it easier when tax time rolls around in a few months.