4 Major Life Events That Change Your Taxes (And What to Do About Them)
Life is full of milestones. Whether you’re walking down the aisle, welcoming a new baby, navigating a divorce, or coping with the loss of a loved one, these major life events naturally take center stage.
But amidst the excitement or emotional weight of these transitions, there’s one crucial detail that often gets overlooked: your taxes.
Major life changes can significantly impact your tax filing requirements, your eligibility for tax benefits, and how much tax is withheld from your paycheck. Here is a breakdown of four common life events and exactly how they affect your tax situation.
1. Getting Married 💍
Tying the knot is exciting, but it also means the IRS views you differently. Marriage can affect your filing status (e.g., Married Filing Jointly vs. Married Filing Separately), your tax withholding, and your eligibility for certain tax benefits.
Your Action Plan:
- Update your name: If you or your spouse changed your name, report it to the Social Security Administration (SSA) first. The name on your tax return must match SSA records.
- Update your address: Notify the U.S. Postal Service, your employer, and the IRS of your new address.
- Check your W-4: Review your tax withholding with your employer and submit a new Form W-4 if needed to ensure the right amount of tax is being withheld from your paychecks.
2. Birth or Adoption of a Child 👶
Welcoming a new child is a joyous occasion, and the tax code offers several financial incentives to help offset the costs of raising a family. A new child may make you eligible for valuable tax benefits, such as:
- The Child Tax Credit (CTC)
- The Adoption Credit
- The Child and Dependent Care Credit
Your Action Plan:
- Secure the SSN: To claim these credits, both the taxpayer and the child must have a valid Social Security Number (SSN). Make sure your child’s SSN is processed and ready before you file.
- Review eligibility: Each credit has specific income limits and eligibility requirements, so check IRS guidelines to see which ones apply to your family.
3. Divorce or Legal Separation ⚖️
Navigating a divorce or legal separation is challenging, and it brings several tax complexities. This transition directly affects your filing status, tax withholding, who has the right to claim dependents, and your eligibility for certain credits and deductions.
Your Action Plan:
- Update your Form W-4: Changes to your income, household size, and filing status mean your old withholding allowances are likely outdated. Submit a new W-4 to your employer to avoid a surprise tax bill.
- Clarify dependent claims: If you have children, ensure your divorce decree clearly outlines which parent claims the child as a dependent in which year to prevent IRS rejection of your return.
4. Death of a Spouse or Family Member 🕊️
Losing a loved one is incredibly difficult, and handling their final tax obligations is one of the many administrative tasks that follows. The death of a spouse or family member affects filing requirements and status for both the deceased and the surviving spouse.
Your Action Plan:
- File a final return: In general, a final individual income tax return for the deceased person should be filed just as it would be if they were still alive.
- Report income accurately: All income earned up to the date of death must be reported.
- Claim what’s owed: Don’t forget to claim any eligible credits or deductions the deceased was entitled to up to their date of passing.
The Golden Rule After Any Major Life Event
No matter which life change you are experiencing, the best thing you can do for your financial health is to pause and reassess. Make it a habit to:
- Review your tax withholding (and update your W-4).
- Update your personal information with the SSA, IRS, and your employer.
- Keep important records organized and easily accessible.
Did you experience a major life event this year? Take 15 minutes today to review your tax profile—it could save you time, stress, and money when tax season rolls around!