The IRS opens for business next week, and millions of Americans will start filing their federal and state tax returns.
Online tax software companies guide you through the tax-filing process by highlighting big life events during the past year, but you can do the same thing on your own. Would what happened last year affect your taxes this year? Take stock now of your big life events – before you file.
Here are seven big life events that can impact you when filing your taxes:
Big Life Event #1: Getting engaged. When you get engaged, money is usually the last thing on everyone’s mind. It’s a lot more fun to discuss engagement parties, the wedding itself, and the honeymoon. The problem is, getting engaged is a big life event that centers around money, and how much you’re spending on that wedding is just the beginning. The mistake most couples make? Being too much in love to discuss your finances before marriage can lead to financial conflict, tax problems, and possibly – thought we hate to say it – divorce, according to tax expert Eva Rosenberg, publisher of TaxMama.com.
Big Life Event #2. Getting married. For the average person, marriage brings a variety of tax benefits, but those in high-income brackets can face tax shock when the so-called “marriage penalty” kicks in. Several taxes are triggered when your combined incomes exceed approximately $400,000, and you could be responsible for your partner’s tax troubles. And, the new Tax Reform bill may complicate things further starting with the tax return you file in April, 2019.
Big Life Event #3. Having a baby. This is one of the biggest life changes—and it will have a direct impact on your tax return. Will your new baby provide an extra exemption, a child tax credit, or (perhaps) a child and dependent care credit?
Big Life Event #4. Selling your home. Some people make a practice of selling a home every few years, while others nest comfortably for years before selling. After you’ve sold your home and the trauma of the move has passed, it’s time to think about the tax implications of selling your home. In 2018, you can still claim a tax free exemption of up to $250,000 (up to $500,000 if you’re married) as long as your home has been your primary residence for the past 2 out of 5 years. That will change for the tax return filed in 2019, when you’ll have to prove you lived in your home for 5 out of the last 8 years as your primary residence.
Big Life Event #5. Getting divorced. It’s an understatement to say that when you get divorced, many things change. But major decisions will need to be made about who cares for the children, who stays in the family home, who gets the pets, who pays which debts, and how any savings, investment, retirement and other assets are valued and divided. And then there are tax ramifications stemming from spousal and childcare support.
Big Life Event #6. Retirement. Retirement is a long-awaited reward for many, but it can also be stressful. After years of savings, it’s time to start carefully withdraw your retirement funds —and spending them without having a steady income on which to rely can make anyone nervous. That’s especially true in an era of super-low interest rates, where it’s likely that you’ll have to spend down some of your principal faster than you’d like. Once you hit 59 1/2 years of age, you can withdraw funds from your qualified retirement accounts (Keogh, 401(k), 403(b), SEP IRA, and others) without paying the 10 percent penalty. However, you’ll still owe federal and state income tax at your current marginal rate. Once you hit 70 1/2 years of age, you’ll have to make your mandatory required withdrawals from those qualified retirement accounts. So, if you’ve just retired or are nearing retirement, keep in mind the tax implications of withdrawing your retirement funds.
Big Life Event #7. Inheriting money. If you inherited money in 2017, there could be tax implications when you file this year. Review your inheritance and talk to a tax professional. The type of taxes you might pay on an inheritance and the amount you might owe will depend on the type of inheritance you received. For those passing down serious amounts of money, the new Tax Reform Act is your friend. According to IRS.gov, under the Tax Cut and Jobs Act the basic exclusion amount for 2018 increases to $10,000,000, before taking into account the necessary inflation adjustment. (The 2018 amount that includes the inflation adjustment has not yet been released. This information will be updated on IRS.gov as soon as it becomes available.) While the exclusion amount is expected to be $11 million per person for estates filed in 2018, you can reduce the amount of your estate by giving away gifts of up to $15,000 per person. There is no limit on the number of people to whom you may give a gift of $15,000 per year.
I’ve covered birth, death, marriage, divorce, retirement, and home sweet home. Don’t be surprised if other big life events, such as a job loss, serious illness (that may not be covered entirely by insurance), catastrophic loss of property, or death of a family member, impact your taxes. Whenever you experience a big life event, you may want to check in with your tax professional, or at least do some research on your own, to understand what it means for your tax return.
Ilyce Glink is the publisher of ThinkGlink.com, and the Founder/CEO of BestMoneyMoves.com.