Earlier this week I wrote about the implications of home ownership, marriage and the birth of a child on your taxes. But there are a lot more life events that can impact how much you pay on Tax Day.
Here are a few tips for those who are college-bound and in the workforce to help you cut your tax bill.
Going to college
Going to, and paying for, college is a big life change for students and their parents. It may be expensive, but it also comes with some tax benefits to help alleviate the pressure during those years of growing student debt and then repaying student loans.
So many taxpayers miss tax benefits for education because of their complexity. Depending on the kind of academic program, what year they’re in, income and other factors, they may qualify for several different tax benefits so it’s important to utilize the one that maximizes tax savings.
One of the most advantageous education benefits is the American opportunity credit, which maxes out at $2,500. It is limited to students in their first four years of undergraduate studies. The lifetime learning credit is worth up to $2,000 and is more widely available to graduate students or people taking courses to improve their job skills.
Once students or graduates begin repaying their loans, they can start deducting the interest they pay, up to $2,500, even if they don’t itemize their deductions.
Starting a business
As far as life changes go, starting a business, even one that’s part of the sharing or gig economy, has one of the biggest tax impacts.
There are so many changes that come with starting a business or becoming self-employed. They’re going to get different information-reporting documents. They’ll file a different form with their tax return. They’ll pay estimated quarterly taxes instead of having tax withheld from a paycheck. They’ll have more generous rules for deducting expenses. They can also get tax benefits to help pay for health insurance.
H&R Block has partnered with United Way to help people file their federal and state taxes for free through MyFreeTaxes, which also provides free specialized forms for self-employed filers.
Losing a job
Losing a job doesn’t just mean losing income. If losing a job also means losing health care, it could lead to a penalty on the tax return.
Losing health insurance due to the loss of a job triggers a special enrollment period with the health insurance marketplace, which taxpayers should take advantage of to avoid a penalty on their tax return. However, they may also qualify for an exemption to the penalty, which they will either need to claim on their tax return or apply for with the marketplace itself.
Also, if a taxpayer receives unemployment benefits or severance, those are taxable. Taxpayers can opt to have taxes withheld so they don’t underpay their taxes and face an underpayment penalty, or they might want to adjust a spouse’s withholding or make estimated payments.
Aging and retiring
Starting at 65, taxpayers could become eligible for an increased standard deduction. At 70 ½, a taxpayer may be required to start taking minimum distributions. Once retired, taxpayers may have a different type of income, like Social Security or Roth IRA distributions, which could be taxed differently than regular wages. Some may not automatically withhold taxes, although taxpayers can opt to have taxes withheld.
Taxpayers will want to make sure to update their withholdings or estimated payments. If they don’t cover their tax liability, they could face underpayment penalties.