By Krishna Raghubeer, CPA
Benjamin Franklin once poignantly stated, “but in the world, nothing can be said to be certain except death and taxes.”
These words do take on added significance particularly during the tax filing season. On a more positive note, our taxes can be influenced (and in some circumstances substantially reduced) by positive life experiences. For every major life change, expected or unexpected, you will find tax issues to follow in tandem. This article focuses on a few of such life experiences.
Your New Dream Job
Oh, the joys of beginning a new job: a brand new office, new co-workers, new boss, new opportunities and a new pile of paperwork for Uncle Sam. Whether you start a part-time job while you’re in high school, or the job of your dreams after four years undergrad, it comes down to this: Your employer will give you a paycheck and Uncle Sam will take a decent chunk of it away. Why? It is income tax withholding. How much? Well, that depends on how you complete your W-4 withholding form.
If you’re a student working part time and are still living under mom and dad’s roof, you probably will be able to claim an “exempt” from tax status since your income is so low.
However, if you’re married with two kids and own your own home, you can claim additional exemptions to reduce the amount of withholding in your paycheck.
Here are some other factors that affect your paycheck withholdings:
– Filing status: Are you single, married, head of household, married filing separate, or a qualifying widow/widower? These will all influence your required withholding.
– Children/dependent status: If you have kids you may qualify for the Child Tax Credit.
– Do you pay a babysitter to watch your child while you and (if married, your spouse) are working or looking for a job? If so, you may qualify for the Child and Dependent Care Credit.
– And if you’re on the lower end of the wage spectrum, you might also qualify for the Earned Income Credit, in which case Uncle Sam gives you back more than you’ve paid in.
– If you have a dependent who is not a child, such as a parent, other deductions and/or credits might also apply to you.
– Other income/deductions: Do you have substantial other income, such as interest and dividends, or rental income? If so, you may have to adjust your withholding to make up for that additional income. If not, chances are you may end up owing taxes when you file your return.
How about deductions? If you have a mortgage or are otherwise able to itemize your deductions, you can adjust your withholding allowances upward to reflect your lower tax liability.
– Starting to pay off student loans? Some of the interest you pay might be deductible, so you’ll want to adjust your withholding allowances accordingly.
Marriage for many is the bonding of two souls, or from Uncle Sam’s perspective: an economic partnership. Many newlyweds, who were accustomed to refunds when they were single, have found themselves come April 15 of the year following their marriage, owing more in taxes that they had expected.
This is attributed mainly to the higher tax bracket their combined income pushes them. Updating your filing status and adjusting the amount of withholding from both spouses’ paychecks can help prevent a shock come tax time.
Unfortunately there are tax consequences if you and your spouse decide to call it quits… When you and your ex are splitting up your assets, your taxes will also be affected. Do keep in mind to update your filing status so withholdings will be appropriately adjusted. When splitting marital assets, your other income such as interest and dividends can also change.
Also, any mortgage interest payments might be divided or eliminated completely while other assets such as rental properties will also be divided, and the tax impact will follow the person who retains the property. In addition, if there are any forced sales of assets that also could generate capital gains which will affect your return.
It is important to remember that your filing status is based on the last day of the year so if you’re still legally married on December 31, you have the option of filing a joint return. If you’re single as of December 31, you are no longer allowed to file a married-joint return. If, however, you have been living apart and young children are in the picture, one or both spouses can claim head-of-household status. Alimony is generally taxable to the person receiving it and deductible by the person paying it.
Also, child support is not taxable to the spouse receiving the payments, and not deductible by the person making the payments. This can substantially impact your tax and financial life. The government’s position is you do not get a tax break for fulfilling your parental obligations.
Leaving Your Job/Retiring
Whether you have chosen to retire or have lost your job due to the economic downturn, this change can greatly affect your taxes and finances in general. With regards to your retirement plan distributions, if you are simply changing jobs, your best bet is probably to rollover your retirement assets such as a 401(k) plan to an Individual Retirement Account or IRA. Avoid moving the funds into your personal account since they will be subject to taxes and possibly penalties. In some instances, you might be able to move your retirement assets directly from your previous employer’s plan to your new employer’s.
The truth is virtually every aspect of your life can and probably will have a bearing on your taxes. Even if your life isn’t changing, tax laws constantly do. Other life events such as death or having a baby also play a role in your tax calculation.
Do consult your tax adviser for further clarification.
Krishna Raghubeer can be contacted by telephone at 718-322-4829, by email at Kraghubeer.CPA@earthlink.net, or by visiting his office at 104-11 120th St, Richmond Hill, NY 11419.