Did you know that a change in marital status, having a child, or sending one off to college, even a change in employment status, can affect your tax return? The last thing on your mind when you are planning your wedding or watching your child go off to college is probably filing your income taxes, but it is a good idea to take time periodically through the year to look at the changes in your life and check your "tax pulse."
Let's look at some of the larger events that you'll need to consider at tax time:
Did you get married this year? A change in marital status has a profound effect on your tax status. Married taxpayers filing a joint return have higher standard deductions, lower tax rates, and they have the advantage of two exemptions of3,800 a piece, even if only one taxpayer worked. Married taxpayers must always claim all income on their tax return when they file jointly. You may file separately, but you lose the benefit of claiming many tax credits and some deductions. In addition, the tax brackets are smaller when filing separately, which generally means a much higher tax.
Did you welcome a new child to your family? Having, or adopting, a child can significantly reduce your tax liability. As a parent you may be entitled to a dependent exemption of3,800 per child as well as a1,000 Child Tax Credit for each dependent child under the age of 17. If you and your spouse work you may also be entitled to a credit of up to2,100 for daycare expenses for children under age 13. If your dependent child started college or trade school this year, you may be eligible for the American Opportunity or Lifetime Learning credit. You may even qualify for a student loan interest deduction if you are paying student loan interest for an adult child. There is also the Earned Income Credit For families who earn less than50,270.
Did you become the primary caretaker for your parent or parents? If so, you may be able to claim your parent as a dependent. If you are paying your dependent parent's medical expenses, or nursing home expenses, you may be able to claim them on your tax return. You may even qualify for a credit for the expense of home health care, senior daycare, or care in your home, while you work.
Have you changed jobs, received a promotion, increased your 401(k) contributions or become self-employed? If so, certain deductions may have opened up to you, and you may also need to change your withholdings.
The expenses of looking for a new job, such as 55.5 cents per mile for driving to job interviews, employment agencies and headhunters may be claimed. The expenses you have for creating a resume, contacting potential employers long-distance, and out-of-town travel may all be deductible.
If you have been promoted, you may need to increase your withholdings so you can ensure that you do not owe come tax time. Likewise, if you have increased your contributions to a 401(k), you have decreased your taxable income, and may want to reduce your withholdings so you can receive your money during the year instead of as a large refund when you file.
If you started your own business (Congratulations!) you need to be sure you are keeping records of the miles you are driving for your business, all expenses you may have from pens, paper, log books, and business cards to employee benefits and expenses.
Did you buy or sell a home? Taxpayers who purchased, sold, or arranged a short-sale of a home, may have tax write offs or consequences. While most costs associated with the purchase or sale of a home are not directly deductible, they can be used to adjust the basis of your home to keep your gain below the250,000 (500,000 if married filing jointly) tax exempt amount. However, the mortgage interest and real estate taxes you pay each year for your home may be deductible on your tax return. When you add these to other deductions, such as charitable contributions, you may be able to substantially lower your income taxes.
If you were in a position to reduce your mortgage principle or had to foreclose on your home, you may have to file a special form to ensure your forgiven loan is not taxed this year.
These are just a few of the many life changes that can have a huge impact on your tax return. If you take the time to review your tax situation periodically, it could save you a lot of time and surprises when you file your tax return in 2013.
Content concerning financial matters, trading or investments is for informational purposes only and should not be relied upon in making financial, trading or investment decisions.