Your income taxes rarely, if ever, remain static. Changes in public policy and changes in your private life can cause your taxes to increase or decrease, depending on your circumstances. Here’s a list of five life changes that could have a significant effect on your income tax bill.
1. Walking down the aisle
There are plenty of wonderful reasons to get married beyond reducing your taxes, but the fact is that tying the knot can result in big tax savings. Usually, changing your tax status to married filing jointly will reduce your tax rates overall. It may also qualify you for larger tax deductions. This is not to say that all couples automatically see a drop in tax liability when they marry. Marriage can increase your taxes in some situations, but that is not the norm.
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2. Adding to your family
Having or adopting a child or claiming additional dependents can lead to significant tax savings. First, you might qualify for the very substantial Child Tax Credit. Depending on your income levels, you may even qualify for the Earned Income Tax Credit. As the years go by, other tax credits may apply, including credits for child care and education.
3. Saving for retirement
Putting away money for your retirement can pay large dividends long before you ever touch your savings. Money you contribute to a tax-advantaged retirement account, including a 401K plan or an individual retirement account (IRA), usually qualifies as a tax deduction, lowering your taxable income and your tax bill. The more you contribute, the more you can usually save, up to the maximum deduction. The savings can usually grow tax-deferred until you begin withdrawing them, at which point they may be subject to taxation.
4. Going to school
Higher education can be expensive, but some educational costs—including the costs of ongoing education—can result in lowering your taxes. Credits like the American Opportunity Credit or the Lifetime Learning Credit are designed to offset $2,000 or more of your qualifying educational expenditures each year. Up to $2,500 of the interest on a student loan may also qualify as a tax deduction.
If you’re self-employed, you might be able to deduct the cost of obtaining specific designations or certifications for your profession. Such expenses may qualify as business deductions.
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5. Purchasing or selling a house
Purchasing a home is a big deal, and there are some big deductions that can accompany it. You may be able to deduct qualifying loan points you paid to the lender at the time of purchase. The mortgage interest you pay throughout the year as well as any property taxes may also be deductible. When you sell a home, you may be able to avoid paying tax on up to $500,000 in capital gains if you’re filing jointly.
These are only a few of the major life changes that you will want to keep in mind when you file your taxes. To learn about other common life events that affect your taxes, visit TurboTax.com.