I’m a Tax Planner: 7 Tax Tips for Major Life Changes

Major life changes can be exciting, overwhelming, scary, or multiple feelings simultaneously. Major life changes can also affect your tax filing.

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GOBankingRates spoke with Logan Allec, owner of Choice Tax Relief, for his insight into what you should know and do regarding your taxes if you have experienced a significant change in your life in the past year.

Know Which Major Life Changes Affect Your Taxes

Some of the most common major life changes affecting your taxes include getting married, buying a home, having or adopting a child, getting divorced, losing a spouse or changing jobs.

Each of these major life changes affects your taxes in different ways. If you don’t account for the change, it can cost you more money when you file your taxes.

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Alert the Proper Authorities

If you change your name or plan to change your name for a marriage or divorce, you must inform the Social Security Administration by filing Form SS-5. If the name on your tax return doesn’t match the name related to your Social Security number, your tax return might be rejected, and any tax refund you are owed could be delayed until the error is fixed.

If the timing of your wedding or divorce doesn’t align well for changing your name before the tax deadline, you can always file a joint return with your spouse using your original/existing name. That gives you more time to alert the Social Security Administration before next year’s tax filing season.

If you have given birth to or adopted a child, you will need to make sure the child has a Social Security number to claim the child as a dependent on your tax return. When you apply for a birth certificate, you can request a Social Security card for your baby at the hospital or file an SS-5 Form with the Social Security Administration and provide proof of the child’s age, identity and U.S. citizenship.

Refine Your Withholdings

After you get married, you and your new spouse may need to adjust withholdings from your paychecks. Since your combined income may now move you into a higher tax bracket, you should adjust your withholdings on your paycheck to avoid being caught off guard by an unexpected tax bill or large tax refund. You will need to fill out a new W-4 form for this, and you may also want to use an online W-4 calculator to help you figure out your withholdings.

Adjust your withholdings if you have a new baby, since you expect a lower tax liability this year. Claiming dependents on your W-4 form can reduce the federal income tax withholdings from your paychecks to account for the additional tax benefit.

Understand the Effects of Tax Debt

If you get married and your spouse comes into the marriage with tax debt, this can also affect you. Understanding the best course of action is important to ensure you have no surprises.

“While the IRS can’t go after your wages for your spouse’s tax debt, it can drain any funds in a joint bank account you share with your spouse,” Allec said. “So if you’re considering marrying someone and intend to keep joint accounts, be sure to have a frank conversation beforehand about finances, including tax debt.

“Remember, the IRS has pretty awesome collections powers that most creditors do not — it does not need to go to court and get a money judgment before issuing a bank account levy; it can simply give the taxpayer sufficient notice and then drain the account.”

Know Your Deductions

If you bought a home in the past tax year, you might be able to deduct your property taxes, the mortgage interest on your primary residence, mortgage points you paid when purchasing the home, and the interest on a home equity loan or home equity line of credit.

If you have a new baby, you will get a Child Tax Credit of up to $2,000 per child. Up to $1,600 is refundable for 2023 using the Additional Child Tax Credit. If you qualify, you will get the full credit, no matter what time of year your child was born. The child tax credit you qualify for can reduce your tax bill dollar-for-dollar and even be refunded if it is greater than the tax you owe.

If you have lost a spouse, you can qualify as a widow or widower for up to two tax years following the death of your partner — though you cannot qualify in the year of their death. The standard deduction for qualifying widows and widowers is currently the same as married filing jointly.

Understand the ‘Nanny Tax’

If you have a baby and plan to use a nanny once you return to work, there are some things you need to know. It might not be as simple as paying them their wages every couple of weeks.

“If you have a new baby and intend to hire a nanny to care for your child while you’re at work, you may have to treat the nanny as a household employee — this means making required income tax withholdings and issuing them a W-2 after year-end,” Allec said. “If you pay your nanny or any other household worker over $2,700 during the year, the IRS will essentially presume that this individual should be treated as a household employee.”

Fill Out the Right Forms

If you get married, divorced, have a child or get a raise, you must fill out a new W-4 form with your employer. This will allow your withholdings to be adjusted accordingly, so you don’t owe more — or less — taxes than you should when it comes time to file.

The Bottom Line

If you have experienced a major life change and are doing your taxes, you should understand how these events will affect your taxes and take the necessary steps to avoid any surprises come tax season.

More From GOBankingRates

This article originally appeared on GOBankingRates.com: I’m a Tax Planner: 7 Tax Tips for Major Life Changes

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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