Life Changes and Tax Implications
Throughout your lifetime, there are many changes that will affect your tax status. Some of these changes include: Marriage/divorce, birth of children, buy or sell a home, start a business, change jobs, contribute to a retirement plan, or retirement.
- Below is a list of some life changes and their tax impacts:
Job Changes
- If you take a new job and moved, you may be eligible to claim moving expenses.
- If you had unreimbursed job related expenses, you may be able to itemize them as employee business expenses.
- You may be eligible to rollover the value of your retirement or pension plan (eg. 401k plan) from your previous employer to your new employer's retirement plan or a traditional Individual Retirement Arrangement (IRA) plan.
Education
- You may be eligible for the Lifetime Learning Credit, which is a nonrefundable credit up to 20% for the first $10,000 of qualified higher education tuition and fees paid during the year for yourself, your spouse, or your dependents.
- You may be eligible for the Hope Credit, which is a nonrefundable credit up to $1,650 per qualified student for tuition and fees paid for the first two years of post-secondary education.
- If you have student loans that you are paying off, you may be eligible to deduct up to $2500 for the interest paid during the year on the qualified higher education loans.
Marriage
- If you are married on December 31st (the last day of the tax year), then you are considered married for the entire tax year. You must file as Married Filing Jointly or Married Filing Separately.
- A spouse can never be claimed as a deduction even if he/she has no earned income.
- The standard deduction for a married couple filing jointly, is $10,900 for 2008. If you or your spouse is blind or 65 or older, then you will have a higher standard deduction.
Divorce
- If you are divorced on December 31st (the last day of the tax year), then you are considered unmarried for the entire tax year. Your filing status is single unless you can qualify to file as head of household.
- Alimony payments are includable in the gross income of the recipient and are deductible by the payer.
- A noncustodial parent can claim the exemption for a dependent child through a divorce or separation agreement or the custodial parent may release the exemption claim through Form 8832. However, the custodial parent may still be eligible to file as head of household.
Children
- For each qualifying child, you can claim an exemption of $3,500.
- If your child is born on or before December 31st, then he/she is assumed to have lived with you for the entire year for tax purposes.
- You may be eligible the nonrefundable Child and Dependent Care Credit if you and your spouse are working, looking for work, or going to school and you have dependent care expenses for your children under the age of 13 during the tax year.
- You may be eligible for the Child Tax Credit of up to $1,000 per dependent child under the age of 17.
House
- Real estate taxes and mortgage interest paid on your primary residence are deductible.
- Points incurred to finance the purchase or improvement of your main home are generally deductible in the year they are paid.
- When you sell your main home, and during the 5-year period ending on the date of the sale, you owned the home for at least 2 years and lived in the home as your main home for at least 2 years, you can exclude up to $250,000 ($500,000 for married filing jointly) of the gain on the sale.
Individual Retirement Arrangements (IRAs)
- For 2008 tax year, you may be able to contribute up to $5,000 ($6,000 for age 50 or older) to a traditional IRA. Part or all of the contribution may be deductible, depending on your eligibilty.
- The money from an early withdrawl (before age 59 1/2) of your IRA will be taxable and may include an additional 10% tax penalty.
Tax Resources
