Life is full of changes, in fact change is the only constant in life. People can experience their life-changing drastically over just one year, maybe joyously, challengingly or painfully. Whether new beginnings or divorce, the addition of a new member in the family or death, everything has its tax implications.
Any event not only changes lives but has a major effect on your tax consequences as well. While calculating the income tax for the year, the tax calculator can assist in the determination of the tax breaks that are qualified owing to the event that took place in the Tax Year.
Here are some of the life-changing events along with their tax implications:
Tax situations alter dramatically after tying the knot as it changes the filing status. There are two options under which return can be filed: married filing jointly and married filing separately. Couples with different salaries might benefit from filing the return jointly. The spouse with lower income can pull the other into a lower tax bracket thus minimizing the taxes. Moreover, those who file their tax return jointly get increased standard deductions, higher limits for charitable contribution and the spouse with no job or income can have their IRAs.
However, filing your return separately can benefit in some special situations. For example, if one of the spouses owes back taxes, then the refund amount can go to that person’s account of filing jointly.
Having a baby
Along with bringing the joys of parenthood, a baby known as ‘a little deduction’ brings great deduction in the taxes. However, after the Tax Cuts and Jobs Act, 2017 overhauled the US tax code, personal and dependent exemptions were eliminated.
Although standard deductions were raised to $12000 for single filers and $24,000 for married couples filing jointly. Further, the child tax credit has also been expanded under the tax reform and other valuable tax credits for the baby like Earned Income Tax Credit, and the Child and Dependent Care Credit also existed. The provisions to claim these deductions and credits are that the parents must claim their child as a dependent on the tax return and the child must be a U.S. citizen, U.S. national or resident alien.
Sending Teenagers to College
The cost associated with education can pay dividends in terms of tax benefits. The American Opportunity Credit offered by the IRS gives credit to the parents up to $2,500 per year of each dependent child. The Lifetime Learning Credit is worth up to $2000.
Moreover, the student loan is also deductible up to $2,500 of the interest on the taxes as long as the parents do not claim the student as a dependent on their tax return. The students can also get a deduction up to $4000 for the qualified educational expense using the tuition and fees deduction.
Divorce is already difficult enough and if the separation took place this year then, a different tax situation can add to this pain, particularly with new tax reform. You may have to file the tax return on you own for the first time. A great tax estimator is freely available on the internet: the tax calculator, which can bring a little relief for the difficult transitions of life.
Alimony is the major change in the new tax reform regarding divorce. It is non-tax-deductible for the payer and non-taxable for the recipient if the divorce or separation agreement was
- finalized after December 31, 2018, or
- Executed before 2019 but later rectified and if the modification states that the revoking of the deduction for alimony payments apply to the rectification.
It is a very good idea for the recipients of alimony checks who are not taxed while having the support. However, not-so-good for the taxpayer who does not get deductions on their taxes. Also, the benefits of filing jointly as a married couple goes away with the marriage and higher taxes may be paid by both partners after the divorce.
Losing a loved one is quite painful and having to pay the “death tax” adds insult to the sufferings. In the year of death, the personal representative of the deceased will have to file a final tax return in his/her name. In the case death of a spouse, an option of filing a joint return for the year can be selected. After that, the taxpayer can file as qualifying widow (er) for two years after the death. This status allows higher standard deduction easing financial burden caused due to the demise of the spouse.
Now, with the new tax reform, the estate tax is not an issue for most people. Under new tax law, the estate can be up to $11,400,000 before there is any need to pay the taxes by the heirs on behalf of the deceased.
Life is the biggest roller coaster ride, and these are breakthrough events that are part of life. Like change, taxes in the USA are also inevitable and by being aware of the tax ramifications beforehand, tax season can be made be less complicated and stressful.