Significant life events, such as marriage, divorce, births and deaths can change a person's life dramatically, sometimes for better and other times for worse. In additional to having a large impact on their emotional and mental state, big changes can also have an affect on a person's taxes. In many ways, significant events can lead to more tax deductions and credits, so it's important that individuals understand their eligibility and detail any big changes to their tax preparer when filing their returns.
For example, marriage often changes a couple's tax situation and benefits eligibility for the better. Married couples can file joint returns, which can open them up to more credits and deductions to lower their liability or increase the size of their refund. Spouses can claim a new exemption on their taxes, and it also makes sense for couples to reassess their existing withholding amounts after tying the knot. According to the IRS, it's typically more advantageous for the higher-earning spouse to claim all the couple's allowances on his or her W-4, with the lower wage earner claiming zero, Bankrate.com explains. Income limits also apply to IRA accounts, making it important for couples filing jointly to keep these new thresholds in mind.
Starting a family is another event that will significantly change a person's tax status. There are several tax breaks available for parents, such as the Child Tax Credit, and working parents who cover the cost of childcare while they're working may also qualify for the Child and Dependent Care Credit. Many parents want their children to have the best educational opportunities, and parents may also consider investing in tax-advantaged 529 savings plans and researching education-related deductions when their children enroll in college.
Large investments carry big tax benefits
One of the biggest life changes a person may make is the decision to purchase a home. A house is undoubtedly the largest investment most individuals make during their lifetime, and there are several tax benefits that can make homeownership more lucrative. Homeowners who itemize their deductions can deduct the interest paid on a mortgage with a balance of up to $1 million, and owners may also be eligible to deduct private mortgage insurance (PMI) as well as mortgage points. Many new homeowners may also want to make upgrades to improve the energy efficiency of their new property. Those who make certain energy efficient upgrades - such as insulation, doors, new roofs and windows - may qualify for a tax credit to help make the purchase more affordable.
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