Having a child, getting promoted or buying a home are all reasons you may need to make tax adjustments in 2018. That could mean adjusting your withholding or increasing retirement plan contributions. We can help you determine what needs to be adjusted to ensure you are in the best position when its’s time to file. Give us a call.
Buying or selling a house
Taxes can change quite a bit after buying or selling a home. Owning a home is often the key that unlocks itemization because homeowners may deduct typically larger expenses like mortgage interest and real estate taxes. Taxpayers only benefit from itemizing if their itemized deductions are bigger than the standard deduction, which will almost double in 2018.
While other common itemized deductions will be capped at $10,000 starting in tax year 2018, mortgage interest will be fully deductible for qualifying mortgages. Once you can itemize, you can take advantage of deducting other expenses like charitable donations.
Itemizing isn’t the only thing homeowners need to be aware of; they also need to keep records of and track their expenses. This will play an important part in reducing or eliminating a tax bill when they sell their house. Whether or not the seller qualifies for the home sale exclusion, they can minimize any tax bill by showing they gained less from the sale of the house by using their expenses that went toward improving the house to increase their basis in the house and decrease their gain.
Getting married
After getting married, taxes change as the couple gets a new tax filing status. The married filing jointly status has more favorable tax rates and qualifies the taxpayers for more tax benefits than if they were to use the married filing separately status. However, there could be situations when taxpayers are better off filing separately.
In some cases, couples might find their situation hands them a “marriage penalty” on their tax return. A marriage penalty exists when two individuals filing a joint return pay more tax than the sum of their individual tax liabilities calculated as if they were filing as single taxpayers. One reason this occurs is because the married filing jointly income tax brackets and thresholds for tax benefits are not always equal to twice the single income tax bracket and tax benefit thresholds.
Even if you find yourself facing a marriage penalty, you cannot file as single. You must use one of the married filing statuses unless you are considered unmarried, which is when you are legally separated or divorced by the end of the year.
The new couple will also want to review any W-4s they filed with their employers to make sure the right amount is being withheld from their taxes after getting married. In some instances, married couples filing jointly can together earn twice as much money as a single individual and remain in the same tax bracket.
Having a child
In terms of life changes and taxes, having a child will likely have a sizable tax impact. Once a taxpayer has a child, they may qualify for a child tax credit of $1,000 in 2017 and $2,000 in 2018. In addition, they can receive a child care credit for their child care expenses or pay these expenses using pre-tax dollars in a dependent care flexible spending account.
It’s easier for parents to qualify for the earned income tax credit because the income limitation more than doubles once you have a baby. This credit can be worth more than $6,000, making it very significant for eligible taxpayers. However, eligibility can vary year-to-year because it is tied to income, filing status and size of family, so it’s important to check in every year so you don’t miss out.
Aging and retiring
Starting at 65, taxpayers could become eligible for an increased standard deduction. At 70 ½, a taxpayer may be required to start taking minimum distributions. Once retired, taxpayers may have a different type of income, like Social Security or Roth IRA distributions, which could be taxed differently than regular wages. Some may not automatically withhold taxes, although taxpayers can opt to have taxes withheld.
You will want to make sure to update your withholdings or estimated payments. If you don’t cover your tax liability, you could face underpayment penalties.