8 Life Events that May Change Your Tax Situation

Life is full of changes, and many significant milestones can affect your tax situation in unforeseen ways. Whether you're getting married, welcoming a new child, starting a new job or making other changes, it's important to understand how these events can affect your taxes. Timely tax planning can help you avoid surprises and comply with the IRS rules.

Here's a brief look at eight common life events and how they could change your tax obligations.

1. Getting Married: New Filing Status and Tax Bracket

Tying the knot is more than a personal commitment — it also changes your tax filing options. Once you're married, you can file jointly or separately. Most couples benefit from the "married filing jointly" status due to lower combined tax rates and higher deduction thresholds. But some exceptions may make it better to file separately.

Consider these essential tax-related issues when you get married:

• You must report your marital status as of December 31 of the tax year.
• Your combined income could push you into a higher or lower tax bracket.
• You may need to adjust your withholding by submitting a new Form W-4 with your employer. Your tax advisor or the IRS Tax Withholding Estimator can help.

Review and update your withholding as soon as possible after your wedding to avoid underpayment or overpayment of taxes.

2. Divorce: Fresh Start with Tax Implications

Divorce often involves financial restructuring, and your tax situation is no exception. After divorce, your filing status typically changes to "single" or, if you qualify, "head of household," which comes with different tax brackets and standard deductions.

Some tax-related changes for those getting divorced include:

• Alimony payments for divorces finalized after 2018 aren't deductible by the payer or taxable to the recipient.
• Child support remains nondeductible and nontaxable.
• You may need to update your withholding to reflect your new filing status and income level.

If your income has changed significantly and you don't withhold enough, you may need to make estimated tax payments to avoid penalties.

3. Childbirth or Adoption: New Credits and Deductions

Welcoming a new child into your family can bring joy — and tax benefits, including:

• The partially refundable Child Tax Credit (up to $2,000 per qualifying child),
• The adoption credit,
• The child and dependent care credit for child care expenses, including day care and day summer camp, and
• Potential eligibility for the Earned Income Tax Credit (EITC).

Update your W-4 to reflect an additional dependent and maximize your credits. This ensures appropriate withholding levels throughout the year.

Additionally, it's never too soon to think about establishing a tax-advantaged savings plan to fund your child's private K-12 and/or college expenses. While contributions aren't deductible for federal tax purposes, some states offer breaks for contributing. The plans usually offer high contribution limits, and there are no income limits for contributing. Generally, any growth is tax-deferred, and distributions made to pay for qualified expenses are tax-exempt. Contact your tax advisor to evaluate your education savings options.

4. New Job: Income and Withholding Adjustments

Starting a new job may increase your income and affect your tax bracket. Your employer will ask you to fill out a new W-4 form. Accurate information is critical to ensure your new employer withholds the correct amount.

If you have multiple jobs or a working spouse, consult your tax advisor or use the IRS's online estimator to avoid under-withholding. Don't forget to include other sources of income, such as freelance or investment income. If you're self-employed or have side income, you may need to make quarterly estimated tax payments.

5. Retirement: From Earning to Drawing Income

Retirement generally marks a shift from earning a paycheck to drawing from retirement accounts, which changes your taxable income sources.

Some tax considerations for new retirees include the following:

• Distributions from traditional IRAs and 401(k)s are generally taxable.
• Required minimum distributions (RMDs) currently start at age 73; failing to take timely RMDs can result in significant penalties.
• Social Security benefits may be taxable, depending on your total income.

It's a good time to recalculate your income and potential tax liability. Retirees often need to adjust or begin making estimated tax payments, especially if taxes aren't withheld from retirement distributions.

6. Buying a Home: Potential Tax Breaks

Purchasing a home is a major financial event that can affect your taxes. If you already itemize, your annual deductions will likely increase. If you've previously taken the standard deduction, it may be advantageous to start itemizing deductions after you buy a home.

Homeowners may be eligible for the following tax breaks:

• Itemized deductions for mortgage interest and property taxes, subject to tax law limits.
• Itemized deductions for points paid to obtain a mortgage in the year paid or over the life of the loan.

Additionally, if you're a first-time homebuyer, you can withdraw up to $10,000 from a traditional IRA penalty-free to help purchase the home. (Normally, an early withdrawal before age 59½ results in a 10% penalty.) Consult your tax advisor to ensure you claim all eligible homeownership tax breaks.

7. Selling a Home: Tax-Free Profit

If you meet the qualifications, the profit from selling your principal residence can be free from federal income tax. An unmarried homeowner can potentially sell a home for a gain of up to $250,000 without owing any federal income tax. If you're married and file jointly, you can potentially pay no tax on up to $500,000 of gain. However, to qualify, you generally must pass two tests:

1. ‍Ownership Test. You must have owned the property for at least two years during the five-year period ending on the sale date.‍
2. Use Test. You must have used the property as a principal residence for at least two years during the same five-year period.

You must pass both tests to qualify for the home sale gain exclusion, but periods of ownership and use don't need to overlap. This is one of the best tax breaks available. Other rules and requirements may apply.

8. Inheritance: Taxable or Not?

Receiving an inheritance can feel like a windfall, but the tax consequences vary based on what you inherit. For example:

• Inherited property generally receives a "step-up" in basis, minimizing or eliminating capital gains taxes if you sell it shortly after receiving it.
• Life insurance proceeds are typically tax-free.
• Retirement account inheritances (like IRAs) may require you to take taxable distributions under IRS rules, especially after changes made under the SECURE Act.

Consult your tax professional promptly to understand how an inheritance will affect your tax liability and plan any estimated tax payments.

Stay Ahead of Tax Changes

Life events can quickly shift your financial landscape. Being proactive with tax planning can save you time and money. Each of these milestones can affect your filing status and the amount of tax you owe — or get refunded.

Contact your tax advisor if you're unsure how a life change may affect your taxes. He or she can help you adjust your withholding, plan estimated payments and make other tax-smart moves to preserve your long-term wealth.