Life and Tax Changes

For every major life change, you'll find associated tax issues. Don't think it's true? Let's see if I can convince you.

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A new career
A new career means a time of new opportunities. The day you start it might be one of the proudest of your life. Whether it's a part-time job while you're in high school, or the dream job you accept after earning your advanced degree, the nitty-gritty is the same: Your employer will give you a paycheck, and Uncle Sam will take some of that paycheck as income tax withholding. How much? That depends on how you complete your W-4 withholding form.

And how should you complete your withholding form? If you're a student, you may be able to claim an exempt status because your income is so low you won't have a tax liability. If you have a spouse, children, and a mortgage, you can claim additional exemptions and reduce your withholding.

Be sure to pay attention to these factors:

Do you have to pay a babysitter to watch your child while you (or you and your spouse) are working? If so, you may qualify for the Dependent Care Credit.
And if you're on the lower end of the wage spectrum, you might also qualify for the Earned Income Credit, in which Uncle Sam gives you back more in withholding than you've paid in.
If you have a dependent who is not a child, such as a parent, other deductions and/or credits might also apply to you.Other income/deductions: Do you have substantial other income, such as interest and dividends? If so, you'll have to adjust your withholding to make up for that additional income.
How about deductions? If you have a mortgage or are otherwise able to itemize your deductions, you can adjust your withholding allowances upward to reflect your lower tax liability.
Starting to pay off student loans? Some of the interest you pay might be deductible, so you'll want to adjust your withholding allowances accordingly.

Marriage
Your wedding day may be the happiest day of your life, but understand that marriage is also an economic partnership, especially in Uncle Sam's eyes. Don't forget:

ton more in taxes that they had expected. It's all due to the filing status, the law, and the amount of withholding from both spouses' paychecks.

Divorce
A divorce, in turn, could be one of the saddest events of your life. But just as a marriage is an economic union, a divorce is tantamount to an economic divestiture.

Tax issues here include:

Likewise, any mortgage interest might be divided or eliminated completely.
Other assets (such as rental properties) will also be divided, and the tax impact will follow the person who retains the property.
There may also be some forced sales of assets that could generate capital gains.Timing and character of filing: Remember that your filing status is based on the last day of the year. If you're still legally married on Dec. 31, you have the option of filing a joint return.
If you're single as of Dec. 31, you are no longer allowed to file a married-joint return, and some planning is in order.
If you've been living apart and young children are in the picture, one or both spouses can claim head-of-household status.Alimony and child support: Alimony is generally taxable to the person receiving it, and deductible by the person paying it.
But child support is not taxable to the spouse (or children) receiving the payments, and not deductible by the person making the payments. This fact alone will have a substantial impact on your tax and financial life, not to mention how your divorce agreement is negotiated.

Leaving your job
If you're retiring, you're probably ecstatic. But if you're leaving for another job -- or, worse, if your employer has asked you to leave -- the experience might be bittersweet. Keep these tax issues in mind:

you're in control of your investment decisions, not some mutual fund manager. You might be able to move your retirement assets directly from your previous employer's plan to your new employer's.Retirement payments: If you take your retirement as an annuity rather than a lump sum, make sure to review your withholding again. Your tax bracket could change, and you'll have to understand how your new tax rate will affect the taxes (and withholding) on your retirement funds.
Alternatively, you might opt not to have any withholding taken from your retirement payments. In that case, learn how estimated taxes work and how to play that game to avoid underpayment penalties.Social Security: Did you know that at certain income levels, up to 85% of your Social Security benefits will be taxable? If this surprises you, you need to read more about the taxability of Social Security benefits.

Virtually every life event will affect your taxes somehow. Even if your life isn't changing, the tax laws are. It's up to you to be vigilant so you can keep as much of your money as you can.