Any Big Life Changes Last Year? Let A CPA Help You Understand How They Impact Your Taxes
Big life changes are stressful, even when they’re positive. It may stress you further to learn such events can have a significant effect on your taxes. In many cases, however, the financial impact is not detrimental but instead can bring you measurable tax benefits.
Just a few events that can transform your life, and your taxes, include:
Buying or selling a home
Getting married or divorced
Having a child or otherwise gaining a dependent
The easiest way to ensure your tax return reflects your current lifestyle is to work with a skilled certified public accountant like the CPAs at Hafen Buckner in St. George. It also helps to develop a basic personal understanding of how life-changing events can alter your taxes.
Getting Married Affects How You File Your Taxes
If you were legally married as of December 31, the IRS considers you to have been married for the full year and you must file as married. You must also file as married if you’re in a common law marriage or if you’ve separated or filed for divorce but the divorce is not yet finalized.
You can choose to file your tax return as Married Filing Jointly or Married Filing Separated. Whichever status you choose, your spouse must file in the same category. The standard deduction for being married amounts to the same regardless of how you file. As of the 2018 tax year, you receive $24,000 if you’re Married Filing Jointly; you and your spouse receive $12,000 each on your respective tax returns if you are Married Filing Separately.
Divorce Affects How You File Your Taxes
If you and your spouse divorce and it’s finalized by December 31, the IRS considers you as having been unmarried for the entire year. You will now be filing as either Single or, if you have a qualifying dependent, as Head of Household.
Alimony Is No Longer Deductible or Taxable
Traditionally, people have been able to deduct any alimony payments they make over the course of a year. Conversely, alimony payments received have been taxable. All of that changed after the Tax Cuts And Job Act of 2017—billed as a way to streamline the tax process—was passed.
If you’re newly divorced and your divorce was finalized before January 31, 2018, you’ll be able to deduct alimony payments on your taxes in this and future years. Essentially, you’ll be “grandfathered” into the old system. If your divorce was finalized after this date, any alimony payments you make will no longer be deductible, nor will any you receive be taxable.
Child support payments are neither deductible or taxable.
Having a Child Affects How You File Your Taxes
When you welcome a child into your family, you qualify for a tax credit meant to help with the high cost of childcare and the country’s growing problem of child poverty.
For the 2018 tax year, parents and guardians receive a $2,000 child credit per child. This credit pertains to your own child as well as relatives under your “kinship care,” like siblings or step-siblings, nieces, nephews or grandchildren, providing you meet certain qualifications.
In order to receive a child tax credit, your modified adjusted gross income for the year can’t exceed $200,000. Any children for whom you receive a child tax credit must:
Be claimed as a dependent on your tax return
Be under 17 at the conclusion of the tax year
Have lived with you for more than half of the tax year (with a few exceptions)
You May Be Eligible For An Adoption Tax Credit
In order to make adoptions less cost-prohibitive and allow more children to be placed in permanent homes, the government allows deductions for certain adoption expenses. The credit doesn’t apply to the adoption of stepchildren, but it does apply to:
Domestic agency and private adoptions
Public foster care adoptions
Qualified adoption expenses include but aren’t limited to:
Attorney and court costs
Travel expenses like meals and lodging
The maximum adoption tax credit for 2018 is $13,840. If you’re adopting a child with special needs, you qualify for the maximum adoption tax credit regardless of how much the adoption cost. As they’re commonly audited by the IRS, it’s recommended you work with a full-service CPA when claiming an adoption credit.
Buying Or Selling Your House May Impact Your Taxes
If you sell your principal residence, a place you’ve lived in for at least two of the five years preceding the sale, you’ll probably pay little or no capital gains taxes. This is assuming your profit—the amount realized by the sale of your house after subtracting selling expenses like closing costs—is below a certain ceiling. A single seller can exclude $250,000 in profit, while married couples can exclude $500,000.
On any profits beyond the threshold for your filing status, you’ll be paying the capital gains tax rate associated with your tax bracket. There are exceptions, however, like if you have to move because you lose your job or become ill.
Your Property Tax May Be Deductible
In some cases, the property tax on a house comes due almost immediately after you close on the sale or purchase of a home. You may be able to include this payment as an itemized deduction on your tax return.
It’s Possible To Prepare For Some Big Life Changes
Not every big life change needs to knock you for a loop. If you’re proactive about creating a personal financial plan, you can prepare for inevitable transitions as well as unexpected eventualities. You can, for instance, save for retirement and also begin to educate yourself on what filing your taxes will look like once you leave the workforce.
Life is complicated, full of planned changes and surprises. These events, a few of which are covered in this article, can spur critical changes in how you file your taxes and what deductions you can claim.