Life changes, both good and bad, usually mean tax changes, so when something significant happens, it’s a good idea think about your taxes to make sure to handle the new situation properly and get all the possible tax benefits.
Here are just a few life changes and the ways they could impact the tax return.
Buying or selling a house
Owning a home is often the key that unlocks itemization because homeowners may deduct typically larger expenses like mortgage interest and real estate taxes. Taxpayers only benefit from itemizing if their itemized deductions are bigger than the standard deduction, which will almost double in 2018.
While other common itemized deductions will be capped at $10,000 starting in 2018, mortgage interest will be fully deductible for qualifying mortgages.
Homeowners also need to keep records of and track their expenses. This will play an important part in reducing or eliminating a tax bill when they sell their house. Whether or not the seller qualifies for the home sale exclusion, they can minimize any tax bill by showing they gained less from the sale of the house by using their expenses that went toward improving the house to increase their basis in the house and decrease their gain.
Taxpayers get a new tax filing status when they get married. The married filing jointly status has more favorable tax rates and qualifies the taxpayers for more tax benefits than if they were to use the married filing separately status. However, there could be situations when taxpayers are better off filing separately.
In some cases, couples may face a “marriage penalty” on their tax return. This happens when two individuals filing a joint return pay more tax than the sum of their individual tax liabilities calculated as if they were filing as single taxpayers.
Even if a couple finds itself facing a marriage penalty, they cannot file as single. They must use one of the married filing statuses unless they are legally separated or divorced by the end of the year.
Having a child
Once a taxpayer has a child, they may qualify for a child tax credit of $1,000 in 2017 and $2,000 in 2018. In addition, they can receive a child care credit for their child care expenses or pay these expenses using pre-tax dollars in a dependent care flexible spending account.
It’s easier for parents to qualify for the earned income tax credit because the income limitation more than doubles once the family has a baby. This credit can be worth more than $6,000, making it very significant for eligible taxpayers. However, eligibility can vary year-to-year because it is tied to income, filing status and size of family, so it’s important to check in every year to avoid missing out on it.
Death is the final life change that impacts a taxpayer. A tax return needs to be filed for a deceased taxpayer in the year they die if they would otherwise be required to file. Additionally, gift and estate taxes may apply to their heirs.
Choosing a tax service is important to help during all of life’s ups and downs, including highs like the birth of a child and lows like the death of a parent. H&R Block has partnered with United Way to help people easily and accurately file their federal and state taxes for free through MyFreeTaxes, which is guaranteed to be 100 percent accurate.
Check out my blog on Thursday where I discuss how job-related changes can impact your return.