So many events can result in big life changes. Joyous or sad, we usually experience these events with friends and family. Unless your accountant happens to be in that circle, they are usually the last to know. Thus, it’s important to have a general idea of which events will impact your taxes and, ideally, to have a discussion with your accountant before the events occur.
A general rule is to talk to your accountant whenever a large amount of money is involved, like when you buy or sell a house, make a big investment, or liquidate significant assets. You should understand the tax implications any time you buy or sell so you are not blindsided. In addition, there are also life changes that don’t involve money but may still have tax consequences. These include moving to a new state, getting married or divorced, having a child, or saving for college. Below you’ll find a list of life changes explained in more detail along with potential tax implications.
1. Moving to Different State
Most people know that when you move, you have to change your address on your driver’s license or ID, forward your mail to your new address, and inform people and companies that send you mail, like your bank and the IRS. In addition, there might be tax implications to moving to a different city, county, or state. For example, if you own a business, you’ll need to register with the secretary of state in the new state, as well as update payroll records. This means your income tax rates might change or that you might be subject to different taxes.
2. Getting Married or Divorced
The filing status on your tax return is a reflection of your marital status as of December 31st. That means if you get married before the clock strikes midnight, you are considered married for the whole year in the eyes of the IRS. The same principle applies for a divorce, with the date of the divorce decree determining the official date.
There are many tax implications to consider when your marital status changes. For example, the Childcare Tax Credit is dependent on income and filing status. Generally, getting married won’t bump you to a higher tax bracket, but getting divorced might. Thus, it’s important to stay ahead of this major life change and its accompanying tax consequences by talking to your accountant.
3. Having a Child
Discuss with your accountant any changes in the dependents that you claim on your tax return. This includes having a baby, adopting, an elderly parent moving in or out, or a child leaving the nest. While the tax implications are minimal for most people, there are situations where it will matter, especially if you usually receive the Earned Income Tax Credit.
4. Saving for College
Embarking on a long-term plan to save for a major life event like college or retirement can have its own challenges without tax implications. However, the tax advantages of qualified accounts like IRAs or 529s can boost your future earnings and make a large impact. While a financial planner can give some general tax advice, you should always discuss these plans with the accountant preparing your taxes.
5. Buying or Selling Investments
Always be aware of the tax implications of your investments. These can be at the time you buy an investment, while you hold the investment, and when you sell the investment. The former doesn’t typically have tax implications. The latter two are more common, as you can receive dividends from an investment, which can be taxable, and you will likely have gains or losses when you sell an investment.
6. Making a Large Purchase
Any time you make a large purchase or sell a large asset you should discuss it with your accountant. Most people know to inform their accountant when they buy or sell a home, but other transactions like buying a car or boat are also important to discuss. Also be sure to discuss any transaction that involves tax credits, like energy-efficient home improvements or electric cars. Don’t take the salesperson’s word for it—they are not tax professionals.
In summary, as the tax code gets more complex, it’s crucial to know what events to discuss with your accountant. There is little way for them to know about these changes beforehand unless you inform them. A failure to properly analyze and plan these life changes can result in paying unnecessary taxes. This is not an exhaustive list, and other life events can have tax implications, so when in doubt, make sure to discuss them with your accountant.