5 Life Changing Events That Change Your Tax Outlook
April 4, 2012 : Teresa L. Clark - Corporate Communications
Reaching life milestones can mean a change in your tax outlook. This includes big life events like your first job, having a baby, and buying a home. Sure, resolutions were made to make this year better than last year, but if you want to file an accurate tax return you need to take a walk down memory lane – all the way back to last year.
Need help jogging your memory about the past? Here are five life changing events to keep in mind when filing your tax return:
1 – Landing your first job
Seeing $8 an hour shrivel to $6 due to taxes withheld is disheartening for those working their first job. But, getting the money back that was withheld for taxes is a possibility.
Generally anyone earning income should consider filing a return to recover taxes withheld and claim tax benefits they’re entitled. But, filing requirements depend on a combination of circumstances, including filing status, income and age. One of the biggest determining factors is whether a worker is claimed as a dependent, which means taxpayers with otherwise identical circumstances may have different filing requirements.
2 – Buying a house or relocating
Homeowners can deduct property taxes, real estate taxes and mortgage interest as itemized tax deductions. However, if your itemized deductions are less than your standard deduction (based on age, filing status and other factors), you should use the standard deduction because that will lower your federal income tax liability.
Did you relocate last year? The expenses of moving to a new job location may have tax benefits for homeowners and renters if the following is true:
- The location of the new home must cause the taxpayer to have to drive more than 50 miles farther than the previous commute.
- The move must have occurred within one year before or after starting a new job.
- The taxpayer must remain at the new residence at least 39 weeks.
3 – Getting married
Generally, married taxpayers file a joint return because of the added tax benefits, including eligibility for certain credits. But, filing separately can sometimes lower a tax bill. For example, if one of the spouses has low income and high medical bills, it could work in their favor to file separately to claim these expenses as itemized deductions. This is because their spouse’s income could make it difficult to reach the threshold for claiming medical expenses.
4 – Becoming a parent
Among the potential tax breaks for new parents are filing as head of household for a more favorable tax rate, claiming up to $3,000 in child care expenses and claiming up to $1,000 for the Child Tax Credit – just to name a few.
The adoption credit is fully refundable for qualified expenses up to $13,360 per child for 2011. Before tax year 2010, adoptive parents could only claim the portion of the credit that reduced their tax liability to zero. Now, the IRS will refund any amount of the Adoption Credit that exceeds the adoptive parents’ tax bill.
Adoptive parents also can “carry-forward” unused credits for adoptions dating back as far as tax year 2005 for potential refunds on their original or amended 2010 tax returns. Parents who adopted special needs children are eligible for the maximum credit available for the adoption year, regardless of actual expenses paid.
5 – Retiring
Did you happen to turn 59½ last year? Generally, you have to pay a 10% penalty if you take money out of your IRA early, but after you reach this milestone distributions are not considered early. However, unless your IRA is a Roth, you will still have to pay tax on the distribution.
Exactly 11 years later when you turn 70½ you will have to start taking distributions from your IRA. You can take your first required minimum distribution as late as April 1 of the year after you reach 70½. After that, you must take your annual required minimum distribution no later than Dec. 31.
Something big happen on that’s not on the list? Talking with a tax professional about your individual situation can help ensure you get all the tax breaks you’re entitled to.
[Image: Photography King via Flickr]