In your 20s, you’re no longer a dependent and you start learning how to do your own taxes, and it usually isn’t too complicated. You’re single, get a W-2 wage statement from your employer, and maybe have some self-employed income from a side hustle. You probably do your own taxes with an online app.
But starting in your late 20s and early 30s, major life changes can occur, and those life changes will both change and complicate your taxes.
Marriage
It doesn’t matter if you’re 22 or 92 when you get married, it will change how you file your taxes. You will no longer be able to file Single—you and your spouse will have to choose whether to file as Married Filing Jointly or Married Filing Separately. Filing jointly usually has advantages and savings over filing separately, such as a higher standard deduction, but it can depend on your situation.
Having Children
Whether married or not, if you have a child or adopt a child, it will also affect your taxes, mostly in a good way. Children come with a variety of tax credits, including the Child Tax Credit, the Dependent Care Credit, and/or the Adoption Credit. If you’re single and have a child, you can file as Head of Household, which comes with a higher standard deduction.
Divorce
You may have believed in “happily ever after” after you got married, but it doesn’t always work out. And like marriage, divorce comes with its own tax changes. You will now have to go back to filing Single or, if you have children that you can claim as dependents, Head of Household. This will lower your standard deduction, and you will only be able to get the child tax credits if you’re the parent who is able to claim them as dependents. Both parents cannot. Also, depending on which state you live in, you may or may not have to claim alimony as income if you receive it, and may or may not be able to deduct alimony if you pay it. Child support is never claimed or deducted.
Buying a House
Like having children, buying a house comes with a few tax breaks. If you have a mortgage, you can now use your mortgage interest as a personal itemized deduction, as well as your property taxes. In addition, if you make any energy efficient home improvements, you may be eligible for some tax credits.
Empty Nest
Once your children have moved away from home or graduated from college and can support themselves, you’re officially an empty nester. This major life change means you can no longer claim that independent adult child as your dependent, meaning you will no longer get any tax credits for that child.
Job Change
Maybe you got a big promotion, or changed careers entirely, or started your own business. Each of these situations will change your taxes. With a job promotion and higher income, you should probably update your W-4 form with your employer to make sure they are withholding the appropriate amount of taxes. If you change careers and take a salary cut to do so, you also may want to update your W-4. And when it comes to starting a business, depending on what type of business you created, you may now have to file corporate taxes for your business, in addition to your personal tax return.
Did you have a major life change this year and are not sure how it will affect your taxes? Reach out to any of our tax preparers at Moore & Paquette Tax Group to answer your questions.
Please note that tax laws change often, and you should always check with a tax preparer for the most up-to-date information.