Wedding bells, funeral processions and baby notices all have their tax consequences. What happens in your life in a given year affects your tax return more than what Congress does.
“Life changes drive many more tax benefits than standard end-of-year tax law changes,” says Mark Steber, chief taxation office of Jackson-Hewitt. But not all life events are good for your bottom line. So, before you use past returns to help prepare this year’s, see if any of these 12 life events will affect your income taxes.
1. Going to college
The IRS offers the American Opportunity Credit for college students. It is worth up to $2,500 and applies to students who are enrolled at least half-time in the first four years of college. (Parents of college students also can qualify.) Student-loan interest is also deductible as long as the student can no longer be claimed as a dependent. It also doesn’t matter if the student’s parents paid the interest, because the debt is in the student’s name. Students also can deduct qualified education expenses up to $4,000 using the tuition and fees deduction.
2. New job
A few tax deductions can apply to you if you get a new job. If you had to move more than 50 miles to take a new job or relocate for your current employer, the IRS will let you deduct the expenses you incur. That includes gas if you drive your own car for the move. Any specialized work clothes or uniforms unsuitable for everyday use can be deducted as an unreimbursed employee expense.) If you join a labor union as part of your new job, any dues or initiation fees also can be deducted as an unreimbursed employee expense.
3. Got married
Getting married changes your tax filing status. There are two options: married filing jointly and married filing separately. The choice that’s right for you and your spouse depends on your individual incomes. Spouses with very different salaries might benefit most from filing jointly. The one with the lower salary can pull the other spouse into a lower tax bracket, reducing their taxes. Those filing jointly also can get higher charitable contribution limits and jobless spouses can have their own IRAs.
Spouses with similar earnings could consider filing separately to avoid a higher tax bracket. Spouses who file separately can hit the adjusted gross income requirements sooner for miscellaneous deductions or for deducting unreimbursed health care expenses. But filing separately can affect deductions for IRA contributions and can eliminate the child tax credit among other breaks.
4. Having a baby
Expenses related to trying to have a baby can be deductible. The cost of a pregnancy test kit as well as medical procedures such as in vitro fertilization and surgery to reverse a vasectomy can be deductible medical expenses. Typically, you can deduct medical and dental expenses that add up to more than 10 percent of your adjusted gross income. Once you have a baby, the cost of breast pumps and supplies that assist lactation are considered deductible medical expenses.
Parents also qualify for a $4,000 exemption for each qualifying child this year. On top of that, parents can get the child tax credit for any dependent child under 17, which is worth up to $1,000 per child. Working parents can claim the child care and dependent care credit to cover the cost of child care (up to $3,000 for one child and $6,000 for more) that enabled either spouse to work or look for a job.
5. Adopting a child
In addition to the above child exemption and credits, parents who adopt a child can get an adoption credit and exclusion. The credit is worth up to $13,400 per child this year and includes any expenses related to the adoption such as home study and other adoption fees, court costs, attorney fees, traveling expenses and other directly related expenses. The credit is nonrefundable, but any excess credit may be carried forward up to five years. If your employer provides any adoption assistance, the IRS excludes this from your income.
6. Buying a house
If you bought a house with a mortgage, you can deduct any interest you pay on that loan. That can also include a second mortgage, line of credit or home equity loan secured by your primary or secondary home. The deduction is typically limited to mortgages $1 million or less and typically up to $100,000 in interest on home equity debt can be deducted.
If you paid for points when you got your mortgage, you can deduct them all if you meet several requirements. Also, if you put less than 20 percent down for your home purchase and are paying for mortgage premium insurance, the IRS allows you to subtract those annual payments. Last, local or state real estate taxes on your home are deductible on your federal taxes.
7. Starting your own business
Fledgling businesses and their owners can deduct some startup costs, such as legal fees, marketing and advertising costs and any bank fees. Any interest on a business loan is a tax-deductible business expense. Similarly, any credit card interest you incur for business purchases is tax-deductible. Office supplies such as paper, computers, printers or scanners can be deducted if they are used only for the business. If you expect the equipment to last longer than year, it should be depreciated on the tax return. Repairs on business equipment are also eligible as a tax deduction.
8. Taking care of elderly parents
Adult children can claim their parents as dependents if they pass a series of tests. The parent’s gross income must be less than $4,000 and the adult child must provide more than half of a person’s total support during the year. The elderly parent doesn’t necessarily have to live with the adult child to qualify.
Additionally, the adult child may claim the child and dependent care credit if the parent is claimed as a dependent or would have been claimed as one except their gross income exceeded the exemption amount.
If you paid for your parent’s medical care, including the cost of prescription medicine, equipment, doctor's visits or hospital stays, you can deduct those expenses if they exceed 10 percent of your adjust gross income. This deduction is available even if the parent can’t be claimed as a dependent.
9. Getting divorced
If you receive spousal support from a divorce, that amount must be included as income on your tax return. If you pay alimony to your ex-spouse, that amount is deductible in the year it was paid (including back alimony). The IRS also considers life insurance premiums, payments to a third party on behalf of your ex-spouse and payments for jointly owned home as alimony. You will need the alimony recipient's Social Security number to get the adjustment. If your spouse does not provide the SSN, they are subject to a $50 penalty. Child support isn’t deductible for the person paying it and isn’t considered taxable income for the parent who receives it. However, the parent who pays child support can claim the child as a dependent if the other parent signs a Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.
10. Job loss
Severance pay or unemployment benefits are taxable as are any payments for accumulated vacation or sick time. Make sure enough taxes are withheld from these payments. While looking for a new job, you can deduct certain expenses such as employment and outplacement agency fees, resume preparation, and travel for job interviews. Job seekers can claim the Lifetime Learning Credit, worth up to $2,000, if they take any higher education course or courses that are meant to lead to a new job.
Generally, your Social Security income will only be taxed if you have income from other sources and your combined income is more than a certain base amount. Regular IRA and 401(k) distributions are taxed as income. But you don’t need to take distributions from those accounts until you reach 70.5 years. After that, you must take the required minimum distribution from your IRAs and Roths, which will be taxed, or face a steep penalty. But you can roll part of that distribution directly to a charity to reduce your adjusted gross income, up to $100,000. Retirees who want to enhance their education can also claim the Lifetime Learning Credit, which is worth up to $2,000 and applies to any higher education course or courses.
12. Spouse’s death
In the year of the spouse’s death, the surviving spouse can file as married filing jointly or married filing separately. If you have a dependent child or stepchild and haven’t remarried, you can file as a qualifying widow(er) with dependent child for the next two years. After that, you much file with either has head of household or a single filer. Most simple estates don’t require an estate tax return. Those that do have combined gross assets and prior taxable gifts exceeding $5,430,000 in 2015. Estates can also pass any of the deceased spouse’s unused exemption to the surviving spouse. If the deceased spouse would have had to pay taxes on the retirement account distributions, then the surviving spouse will still have to pay those taxes.