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Life Milestones and Their Effect on Your Taxes

The breadth of our life experiences and changes that occur as we mature always have wider tax implications. The major milestones of our lives bring both tax benefits and liabilities. Almost every milestone we reach, whether it includes the excitement of change or the sadness of loss, directly or indirectly affects our status as a taxpayer.

For example:

Getting married

Whether you file separately or jointly, your filing status will change when you marry. You will be able to claim a new tax exemption and adjust your paycheck deductions. Also, working couples have an advantage over single taxpayers, whose earnings reach the higher tax brackets sooner.

Having children

new baby tax benefitsYour little bundle of joy becomes a tax exemption for the entire tax year. With the 2 AM feedings come advantages like child tax credits and other benefits. For example, when both spouses return to work, there is the Child and Dependent Care Tax Credit to pay a babysitter during the workday. Also there are tax credits and other breaks when the child goes off to college.

Losing your job

Lose your job and you immediately enter a lower tax bracket. Worse news is that you will be taxed on unemployment benefits and will be liable for taxes on severance pay and vacation time your former employer bought back. Make sure your former employer sends you that W-2. Keep track of job search expenses- they could be tax deductible.

Divorcing or Legally Separating

You are considered unmarried at the end of the tax year when separated under a divorce decree or a separate maintenance agreement. Alimony you receive or pay is either taxed or can be deducted, depending on whether you are the receiver or the donor.

Likewise, whichever divorced parent has custody of a child for the greater part of the calendar year will be eligible for dependency deductions and other tax benefits accruing from having a child. Although alimony can be tax deductible, child support is not.

Moving to another state

moving to another state tax savingsHeading out for that new job and fresh start? You can deduct some of your moving expenses for which your employer will not reimburse you . You will need to deal with the tax rules of both your former and your new state and might end up filing two state tax returns. Also, resist the temptation to cash in your former employer’s retirement plan. Otherwise, you could be looking at a high income tax rate on the proceeds.

Saving for retirement

Most likely, your Social Security benefits will not be enough to assure a comfortable retirement. Whether you participate in a 401(k) or traditional IRA, your contributions will reduce your yearly income tax bite. Your retirement years will also be taxed as the government takes back some of that Social Security money for income tax and Medicare coverage. You will also need to plan those traditional IRA withdrawals beginning at age 70 years six months.

Meanwhile, in between milestones…

Life happens in between all of these milestones. We get busy and sometimes forget the tax implications of our happiest and saddest moments. Reach out to us at Dukhon Tax and Accounting if there is any way we can help you focus on these milestones without worrying about your taxes.

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