Your tax years are like thumbprints: No two tax years will look alike. One year you are single, and you're married the next. One year you rent and the next you buy a home. You live on the East Coast one year and then move to the West Coast.
You might have experienced some life changes in the year 2016. Here are a few possible events and how they can impact someone's income taxes:
Did you tie the knot last year? If so, congratulations! You and your spouse can file taxes together. According to TurboTax, filing a joint tax return will give you a lower tax rate with better deductions and exemptions. Most couples opt for filing a joint return to optimize their tax refund. If marriage means a last-name change, notify the Social Security Administration so your number will coincide with your new name.
On the other hand, divorces will also affect your tax season. If you are separated or divorced, you will need to file as "head of household" if you retained custody of a child or a dependent. Lawyers.com's tax planning section shows taxpayers what to expect when filing taxes if divorced or separated.
Congratulations on your new addition to the family! Did you know a new child becomes a dependent on your tax forms and can give you access to the Child Tax Credit? According to TurboTax, you can save up to $1,000 per child if you meet the Child Tax Credit requirements.
Being in college or having children in college can provide significant tax benefits. There are three tax credits for college students: the American Opportunity Tax Credit, the Lifetime Learning Credit and the Hope Scholarship Tax Credit. Tuition and fees also can be used as income deductions.
So, should you choose a tax credit or a deduction? The tax website efile.com says tax credits will reduce your tax bill dollar for dollar, whereas a tax deduction will only reduce your taxable income. You will need to see which credits you qualify for and then do the math to see how much you will save, but credits usually save more in taxes than deductions.
If you changed jobs or are hunting for a new job, your taxes may be affected. Any severance pay is taxable income, as well as accumulated vacation or sick time that end up as compensation, according to Kiplinger's tax planning section. If you are job hunting, any expenses relating to hiring a head hunter, traveling or printing resumes and cover letters can be deducted, as well as moving expenses, if you relocate for a new job.
A new home comes with new responsibilities and significant tax breaks. TurboTax suggests taxpayers take advantage of mortgage interest, real estate taxes and paid points deductions from income.
If you are selling your house, you can save up to $500,000 in taxes. To qualify for the exclusion, you must have lived in the house for two of the five years just before the sale. If you want your exclusion to be doubled from $250,000 to $500,000, TurboTax recommends filing jointly with your spouse.
Even when you die, you still have to pay taxes. Fortunately, an executor will file your taxes. Your executor is responsible for paying any remaining taxes you owe and reporting all income up to the date of death. Frasier Sherman with The Nest says your beneficiaries cannot claim your estate until your executor has filed your taxes. If you receive any refunds or withholdings from the IRS, then those will go toward your estate, assuming you have no beneficiaries in your will.
The first year of running your own business can be overwhelming, and those first-year tax elections can be significant. To make sure you take advantage of the benefits of self-employment, consult a tax professional about what you can deduct and what you can't.