As you consider your finances and prepare to file your taxes, you need to think about whether or not you are subject to life changes in recent months. There are some life changes that can dramatically impact your taxes, and you need to be ready for that.
If you have been filing your taxes jointly, a divorce could change things because you will have a new filing status. Remember that your filing status is determined by your situation on December 31.
I was divorced in September of 2015. As a result, when filing my taxes in 2016 (for tax year 2015), my status will be Head of Household since I will be claiming my son on my taxes. My ex, however, will file as Single. Even though we were married for most of 2015, our situation on December 31 determines how we are viewed for the entire year.
Consult with a tax professional about your filing status, and what it takes to file as Head of Household. There are certain benefits that come with filing this way, which can be a better situation than filing as Single if you qualify.
On the flip side, if you get married, you can file jointly if it makes sense. As always, December 31 is the deciding date. So, if you get married on December 30, you will be considered married for the whole year. You can file jointly or separately, but you have to acknowledge that you are married.
In many cases, especially if there is a wide disparity in income, you can come out ahead by filing jointly. This is an advantage to you in the long run.
3. Death of a Partner
If your spouse dies, your filing status will change. You can file as a qualifying Widow or Widower. This filing status comes with different benefits, depending on whether or not you have a qualified dependent. It’s also worth noting that you might need to file a joint return with your deceased spouse, or file separately, if you remarry during that year. Things can get a little complicated, depending on your situation on December 31. Consult with a qualified and knowledgeable tax professional if you are unsure of how to proceed. Choosing a filing status can be tricky, and you don’t want to pick the wrong one — only to have to file an amended return later or owe more to the IRS at some point.
4. Birth of a Child
Many people forget to include this information when they file a tax return. However, the birth of a child can mean dramatic changes to your taxes — especially if this is your first child.
First of all, you might qualify for an Earned Income Credit based on the number of children you have, up to three. This is a credit, so it reduces the tax you owe dollar for dollar. On top of that, it’s refundable, so you can receive back, in cash, the amount of money your credit is worth beyond offsetting what you owe in taxes.
You might also be eligible for a Child Tax Credit. This tax credit is partially refundable in some cases. Might be able to reduce your tax liability with the help of this credit.
If you use childcare, you might also be eligible for a Dependent Care Credit. Check into what’s available to you, since there are different tax breaks related to having kids.
Even if you don’t add a child to your family due to birth, you can get a tax benefit by adding a child through adoption. This is a big change in your life, and one that you might be waiting for. Unfortunately, adoption can also be very expensive. One way to offset the costs of adoption is to take advantage of the Adoption Credit from the IRS. This tax credit is not refundable, however, so it can’t result in a refund, but can only bring your tax liability to zero. But it’s still a big help for those looking to expand their families.
As you look back over your year, take note of the major changes in your life. Pay attention to what benefits you are eligible, and how these life changes might affect your filing status or the tax breaks you can claim. Then, work with a professional to get the best possible result.