LIFE CHANGES AND YOUR TAXES
As you know, lowering your tax bill involves careful planning. In fact, there’s hardly an aspect of your financial situation—savings, education, real estate, investments, retirement funding, or estate planning—that isn’t influenced by taxes. Tax planning is especially important if your circumstances have changed over the past year. As you begin preparing your taxes in anticipation of the April 15 deadline, take a stroll down the front of Form 1040, and think about the life changes you have experienced in the past year.
Have you married or divorced in the past year? Near the top of the form you must declare your filing status (single, married filing jointly, married filing separately, or head of household), which determines your marginal tax rate (the rate at which your last dollar of income is taxed).
Have you had a baby, adopted a child, or assumed caregiving responsibilities for a loved one? If so, the number of exemptions you claim, or dependents you support, may change.
Have you changed jobs, started a home business, or rented out your second home? There are more than a dozen types of income that you must report, as applicable to your situation.
Have you made payments on a mortgage, incurred medical expenses, or donated to charity? At the bottom of the form, you will list any deductions, which in turn reduce your total income to adjusted gross income (AGI).
The Importance of Timing
Waiting until just before April 15 to think about your taxes may prove to be costly. By coordinating your tax strategies with your life changes and financial strategies, you may lower your tax bill while working toward a variety of short- and long-term goals, such as paying off credit card debt, buying a home, helping to pay for a child’s education, and funding your retirement.