When approaching a major life milestone, you’re probably not thinking about tax time. While this is understandable, it’s important to remember that major life events often change how much you owe to the IRS. Here’s what to expect from six of the biggest.
1. Getting Married
After you get married, you typically file a joint return with your spouse. This can cause your taxes to go up or down. If one spouse earns a lot more than the other, there’s a chance your combined bill will go down because you’ll average out to a lower bracket.
On the other hand, when couples of roughly equal income marry, they can face an increased tax burden. As noted by the Tax Foundation, this is especially true for high-income earners because the high-income tax bracket ranges for married filers are a little less than double the single filer ranges. Two single people making $150,000 a year would individually owe 28% of their income. Two married people making $150,000 a year combined would owe 33% of their income. Low-income earners can face similar penalties.
Unfortunately, you can’t go back to filing as individuals while you are married. While there is an option of “married filing separately,” it does not cancel out the extra marriage taxes.
2. Becoming a Parent or Guardian
Having or adopting a child may lower the amount you pay every year. You’ll qualify to exempt more of your income and could qualify for credits for childcare expenses (like daycare).
If you become the guardian of a disabled or elderly family member, you become eligible for extra benefits. To be eligible, you must be providing more than 50 percent of the financial support for your relative’s needs, according to Bankrate.
3. Getting Divorced
If you get divorced, you go back to filing as an individual. This cancels out the tax impact of your marriage. Whether a legal separation is sufficient to change your filing situation depends on your state of residence, according to TurboTax. Some states let you count as an “individual” after a separation, while others require you wait for the actual divorce.
4. Starting a Business
Starting a new business comes with all kinds of new requirements that you should review with an accountant. You now handle the withholding for any business income and send the taxes to the IRS yourself. When you are an employee, your employer does this for you, but not when you own a business. This can be a nasty surprise because you will have a large bill waiting if you do not properly handle your withholding.
5. Moving to a New State
Every state charges different income tax rates, so when you move, expect that your situation will change. Double-check while you’re moving (or thinking about it) so you can adjust your budget.
6. Retiring
Retiring doesn’t change your filing status but it changes how much you earn. You could still owe income taxes if you are taking money out of a retirement plan or have other investment income. However, you may owe less every April.
Adjusting Withholding
Any time you encounter a major life milestone like these, you should review and possibly adjust the withholding on your paycheck to match your new situation. You do this by filling out a Form W-4 with your employer.
Life gets hectic during these milestones, but make sure you don’t forget about your finances. By watching out for these events, you can prepare for any changes along the way.
