As things in your life change and you reach different life milestones, you face different tax rules at each stage of your life. You can minimize many negative effects of tax rules as your life changes by planning for them in advance.
Here are some of the most common life stages and what it means for your tax situation:
Getting a Job
As you stop relying on your parents or guardians to pay for your expenses and get your own full-time job, you will begin experiencing what it means to be a wage earner in the United States. Getting a job means you become a taxpayer and you may not realize just how much of your check is going to go to taxes until you see your first paystub!
You’ll pay federal income taxes, Social Security and Medicare taxes from each paycheck. The amount is a percentage that is based on your earnings. Depending which state you live in, you may also pay income taxes to the state from each paycheck.
As a wage earner, it’s important that you set up your withholding information correctly to minimize your taxes without causing a hefty tax bill when you file your income taxes. If you have too much money withheld from your paycheck you will end up with a refund at tax time; and if you don’t withhold enough, you will end up with a tax bill to pay. Withholdings are adjusted on the W-4 form that you fill out when you first get hired, but you can make changes to your withholding if you decide it is necessary.
When you fall in love and decide to marry you may find the marriage tax penalty changes what you are used to at income tax time. There is no actual penalty for getting married, but what happens is when you combine finances and file your income taxes jointly, some of that income gets pushed into a higher tax bracket and therefore you pay higher income taxes on that portion of your income. On the other hand, if one spouse makes a lot less money than the other spouse, it can actually benefit the couple by pulling some of the higher earning spouse’s income into a lower tax bracket where lower income taxes are paid.
To minimize tax problems due to marriage, check and change each spouse’s tax withholdings on W-4 form as necessary. Seek advice from a tax professional or use the IRS withholding calculator to help you figure out what you need to change each spouse’s withholdings to in order to best take advantage of the situation.
Buying a House
When you move from renting to becoming a homeowner, you will usually benefit from a variety of homeowner deductions or credits. The year you buy the home, you can include real estate taxes paid to the sellers as a tax deduction.
As a homeowner, you have the ability to deduct the interest paid on your mortgage. In January, you will receive a Form 1098 from your mortgage lender which shows how much interest you paid the year before and this amount can be deducted on Schedule A when you file your income taxes.
In addition to mortgage interest, if you paid points to the lender they should also be shown on your Form 1098 and can be deducted. If you pay real estate taxes, you can deduct local property taxes paid. You will receive a form from your lender if you pay taxes through escrow; but if you pay the local municipality directly, you will need to find your payment record or the tax bill itself.
Having a Baby
Raising a family is expensive, but the IRS offers a variety of ways to reduce the tax burden for families. In 2012, when you claim a dependent on your income taxes, $3,800 of your income is sheltered from taxes (unless you are subject to the alternative minimum tax, then you can’t claim the dependency exemption).
From the time your child is born until they are the age of 17, you can claim a $1,000 child tax credit. This amount may be reduced to $500 per child in 2013.
If you are single and have a baby, you may be able to change your tax filing status from single to head-of-household, which gives you a bigger standard deduction and a variety of other tax benefits you can’t claim as a married couple.
You may be able to change your withholdings to claim the extra dependent, which reduces the amount of taxes you pay from your paycheck.
Also, if you pay someone to watch your children so you can work you can claim a child care credit which provides a credit between $600 and $1,050 depending how much you spend on child care and how much you earn.