Major life events often bring financial changes, and taxes can easily become an afterthought. From selling a home to changing jobs or caring for a parent, understanding the potential tax impact ahead of time can help you avoid surprises and make better financial decisions.
Life rarely stands still. A new job, a move, a marriage, an inheritance, or a change in your family can significantly affect your finances. While taxes may not be the first thing on your mind when these events occur, many common life changes can have important tax consequences.
Here are six situations where some advance planning can make a difference.
Selling Your Home
Selling a primary residence can provide significant tax advantages, but that does not necessarily mean every dollar of gain is tax free.
Qualifying homeowners may generally exclude up to $250,000 of gain from the sale of a primary residence, or up to $500,000 for married couples filing jointly. However, the rules can become more complicated when a property includes a detached office, studio, or another structure that was not used as part of the residence.
Planning can also be important when two homeowners are combining households and selling one or both properties. Understanding the timing and eligibility requirements can help preserve available exclusions.
Good recordkeeping matters as well. Documentation of qualifying home improvements can increase your basis in the property, potentially reducing the taxable gain when the home is eventually sold.
Starting a New Job
A new position may mean a new salary, benefits, and opportunities, but it can also change your tax situation.
Each employer generally calculates withholding based on the wages it pays and the information provided on your Form W 4. If you change jobs or work for multiple employers during the year, your combined income may result in too little tax being withheld.
Reviewing your withholding after a job change can help identify a potential shortfall before tax season arrives.
Relocation can add another layer of complexity. Moving expenses are generally no longer deductible, making employer reimbursement or relocation assistance worth considering when negotiating a compensation package. Moving across state lines may also create filing requirements in more than one state.
Getting Married or Divorced
Marriage and divorce can affect much more than the filing status listed on your tax return.
Either event can change the deductions, credits, income thresholds, and other tax provisions that apply to you. Withholding and estimated tax payments may also need to be adjusted based on your new circumstances.
Timing matters, too. For federal tax purposes, your marital status on the final day of the year generally determines your filing status for that entire tax year. A couple married on December 31, for example, is generally considered married for the full year.
Reviewing your tax situation when your marital status changes can help prevent unexpected results when you file.
Receiving an Inheritance
Receiving money or property after the death of a family member can introduce tax considerations that aren’t immediately obvious.
Many inheritances are not considered federal taxable income when received, but the assets themselves may have important tax implications.
Inherited retirement accounts, for example, can be subject to distribution requirements that result in taxable income. Inherited property generally receives a stepped up basis based on its fair market value, which can significantly affect the gain or loss recognized if the property is later sold.
State rules also matter. Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania impose an inheritance tax, so where the deceased person lived and the type of property inherited can be important considerations.
Helping Care for Aging Parents
Providing financial support for an aging parent can create expenses, but some of those costs may also provide tax benefits.
Depending on the circumstances, an adult child may be able to claim a parent as a dependent. Certain medical expenses paid on a parent’s behalf may also qualify as deductible medical expenses.
Families paying for care that allows them to continue working may also qualify for the Child and Dependent Care Credit in certain situations.
Because eligibility depends on factors such as income, financial support, living arrangements, and the type of expenses involved, keeping good records throughout the year can be especially valuable.
Managing Significant Medical Expenses
A major illness, surgery, or other medical event can result in substantial out of pocket expenses. In some circumstances, those expenses can reduce taxable income.
Taxpayers who itemize deductions may be able to deduct qualifying medical expenses that exceed 7.5% of adjusted gross income.
Eligible expenses can extend beyond traditional doctor and hospital bills. Certain dental expenses, long term care costs, medical travel, and medically necessary home improvements may also qualify.
If you anticipate significant medical expenses, documenting those costs throughout the year can make it much easier to determine what may be deductible at tax time.
Plan for the Tax Impact Before the Decision
Tax planning isn’t limited to year end strategies or business transactions. Some of the most important planning opportunities arise from ordinary changes in your personal life.
Selling a home, changing jobs, getting married, receiving an inheritance, caring for a parent, or dealing with significant medical expenses can all change your tax situation.
Understanding those implications before making a major financial decision gives you more opportunities to plan rather than simply dealing with the tax consequences afterward.
If you’re experiencing a significant life change and aren’t sure how it could affect your taxes, contact Somich & Associates. Our team can help you understand the potential tax implications and plan accordingly.