Episode 23 | 20 Mins
8 Reasons Your Tax Pro Should Be Your Best Friend
Your tax professional should know about the things going on in your life like your best friend does, and in some cases even more so. In this episode, I discuss 8 major life changes that should be discussed with your tax professional either before they happen or as soon as possible after.
Okay, maybe not your best friend. You don’t have to invite us to family functions and birthday parties. You don’t need to call us up in the middle of the night when you can’t sleep, or after a long hard day at work to vent. You probably shouldn’t call us up in an emergency to watch the kids (although, kudos to the tax pros that will answer that call!).
But your tax professional should definitely know about the things that are going on in your life like your best friend does. Maybe even more than your best friend does. More times than not, major life changes will affect your tax situation and although a lot of your decisions won’t be tax motivated, they should be tax informed.
Now, as a tax professional, I think that I would have the support of my colleagues when I say that we would prefer that you reach out to us before you make a major decision. That way, we can catch those situations where the tax cost may outweigh the benefit of whatever you’re trying to do and can try to steer you in a better, more advantageous direction.
However, there are some situations where you can’t contact us beforehand. Some examples of that would be a sudden death, a surprise pregnancy, a winning Powerball ticket, or a drunk weekend in Vegas where you decided to elope on a whim. In those instances, we in the tax community would urge you contact us as soon as possible so that we can guide you on what adjustments you should make to your withholding, recalculate your estimated payments, and/or prepare you for what to expect come tax time, among other things
(like convincing you to split your lottery winnings 50-50 with your dear old bestie aka tax pro or persuading you to name the baby after us).
Here is a list of 8 major life changes that you should contact your tax professional about:
He finally popped the question! She said yes! Now, all you have to do is choose a date, right? Wouldn’t a New Year’s Eve wedding be so romantic? Maybe, but it will also affect your tax return. Your filing status is determined based largely in part on your marital status as of December 31 of the tax year. That means that even if you are single for 364 days during the year, getting married on December 31 will cause you to be considered married for the whole year and you will have to file either Married Filing Jointly or Married Filing Separately. Single or Head of Household is no longer available. But getting married helps on taxes, right? Not always. While it’s true your deductions are higher and tax brackets are wider than if you were single, you will also be reporting more income. If one of you was itemizing your deductions on your single return, and the other was taking the standard deduction, you may lose out on some deductions that are based on your now higher income, and you may not have enough deductions together to get above the married standard deduction. On top of that, since you were only having taxes withheld based on being a single income earner all year, you may have underpaid your tax liability throughout the year and may owe. On the other hand, you may be in a situation where filing a joint tax return actually does help you, and may be able to adjust how much money is being taken out of your paycheck to keep more money in your pocket throughout the year. See what I mean? Taxes can get complicated quickly.
HAVING A BABY/ADOPTING
It’s confirmed, you’re expecting! You’ve got so many things to do before the new addition comes, and talking to your tax professional should definitely be one of them. Medical expenses might be deductible. You may get a credit for adoption expenses. There’s the child tax credit, the child and dependent care credit, tax-free dependent care benefits, and earned income credit to discuss. There are college savings plans options to consider. There’s the business of changing your withholding at work. Speaking of work, are you planning on staying home with the baby? If so, let’s see how that change in income will affect your tax situation. Thinking about hiring a nanny? You may have to account for household employment taxes. See, this is why you should go ahead and just name the baby after me. One less thing on your plate to worry about.
An unfortunate part of life, death happens whether we are ready for it or not. Many people get another blow at tax time when they realize that they have to include certain property as income and they didn’t plan for it properly. Distributions paid to you as a beneficiary from the deceased person’s retirement are includable on your tax return. Depending on how old the deceased would have been, you may be required to take a distribution from an inherited retirement account. If there was not enough tax withheld to cover the increase in tax liability, that can leave you owing tax in April. If you inherited stock or other property, such as a home, and sell it, you may have a capital gain. This increase in income can phase you out of some credits and deductions that you might generally qualify for.
STARTING A BUSINESS
So you’ve decided to get out of the rat race and start your own business. Congratulations! Now how will that new business affect your tax return? Do you need a tax ID number? How much tax will you pay on your profits? What if you have a loss? Can you take a deduction for the space you use in your home for your business? What about your equipment? Can you pay your employees as independent contractors? What forms do you need to file throughout the year to stay compliant? Hmmm… if only there was a person that could answer all of these questions for you before tax time so you would be prepared.
TAKING AN EARLY DISTRIBUTION FROM YOUR RETIREMENT ACCOUNT
We get it. Times get hard and that money just sitting in your retirement account is pretty tempting. It’s like you can hear it calling your name. Taking a distribution from that account too early may carry a 10% penalty (in addition to the income tax) and reduces the amount of money you will have in retirement. In addition to the 10% penalty, a distribution will increase your household income, and if you are getting a premium tax credit you will need to update your income with the Marketplace or be prepared to pay back some or all of the credit in April. Contact your tax professional before you make the decision to withdraw so that we can help you decide if this is truly the best option for you and, if so, if there are any exceptions to the early withdrawal penalty that you may qualify for.
STARTING/LEAVING A JOB
If you went from being unemployed to gainfully employed, you may now have additional expenses that could affect your tax return. For example, if you have to have someone take care of your child or other dependent, you may qualify for a credit on the expenses that you paid for that care. On the flip side, leaving a job can have its own tax implications. If you leave your job and cash out your retirement account without rolling it over, you may be subject to the early withdrawal penalty we discussed earlier. Also, since you will no longer be covered by health insurance with your former employer, you may need to go through the Marketplace, and you may qualify for a tax credit to help cover your insurance premiums.
If you’re moving across state lines, you may be required to file two state tax returns in the year of the move. It’s a good idea to let your tax professional know ahead of time because you may have income that might be exempt in one state and taxable in the other. Having that information may not make or break your decision to move, but it’s definitely helpful to know so that you will be prepared come April when you notice that your state tax bill is higher because you’re paying taxes on income you previously didn’t. Your tax professional could also help you find out if the city that you’re moving to has a local income tax. And even if none of these things apply to you, it’s just polite to let your tax professional know that you’re moving so they can know where to send your holiday card.
PURCHASE/SALE OF HOME
Homeownership has its privileges, and two of them are the mortgage interest and real estate tax deductions that you can claim if you itemize. If you pay points when you purchase your home, you may be able to deduct those points in full in the year of purchase. When you sell your home at a gain, you may be able to exclude all or part of the gain from your tax return. If your tax professional knows about the sale before it happens, she can run estimates using different price points to determine how much, if any, of the gain you might have to include in your income and whether or not you will need to make extra payments to the IRS throughout the year to cover the tax.
This is by no means an all inclusive list. As tax professionals, we generally like to know as much as we can about our clients so that we can properly advise you on how to optimize your tax situation. We love to see you and hear from you year-round, and not just once a year one the damage is done. If any of these, or other, major life changes happen to you, pick up the phone and reach out to us. Let us congratulate you or offer our condolences, and then let us get to work.
And, although you don’t have to invite us to the family functions and birthday parties, it’d be nice if you did.
Since we’re besties now, click here to come hang out with me over on Instagram!
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