Filing Taxes When You’ve Had a Life Change
Filing income taxes is arguably one of the least fun parts of being an adult. (Colonoscopy? Okay, maybe. But get one anyway if you’re due.) We know our tax dollars fund vital pieces of America’s infrastructure, but figuring out how much we are owed (or how much we owe) is often cumbersome and complicated, even in the best of times. Throw in a major life change – like a move, marriage, divorce, side hustle or sickness – and the task of filing taxes can rise even higher on the aggravation scale.
If you went through anything out of the ordinary in 2022, here’s a rundown of what to consider as you (or your tax professional) prepare to file.
If You Lost Your Job
If you received unemployment benefits in 2022, you should receive form 1099-G in the mail. It will show the gross amount of unemployment income you received and how much was withheld for taxes.
If it seems counterintuitive that you’re paying taxes on unemployment income because you’re out of work and not bringing in income, you’re not alone. And, depending on how long you were out of work, you may find yourself with a tax bill you can’t afford to pay right now. You’ll still want to file your taxes by the April 18th deadline and work with the IRS on creating a payment plan.
If Your Relationship Status Changed
A change in relationship status may call for a change in your tax filing status (e.g. whether you file as single, head-of-household, married filing separately, married filing jointly). This is a big one because your tax bracket (and ultimately the amount you pay) is determined by marital status, how many children you claim, your job and a few other factors.
Your relationship status on the last day of every year determines what filing status you can use. Strategically, you should pick the filing status that will save you the most in taxes. Some things to keep in mind:
If You Got Married
If you officially tied the knot in 2022, congrats! The “married filing jointly” filing status is often more financially beneficial than choosing “married filing separately,” says CPA Ross Riskin, assistant professor of taxation at The American College of Financial Services. There are, of course, exceptions. Riskin notes if you and your spouse are both high earners with similar incomes, the combination could push you into a higher tax bracket when filing jointly.
If You Got Divorced
If you got divorced and are paying or receiving alimony, the Tax Cuts and Jobs Act of 2017 means it is no longer counted as taxable income. Nor is it deductible for the person paying it. Your marital status on December 31, 2022 (or the last day of any year as mentioned above) will affect how you file. If you aren’t officially divorced by the end of the year, you may still file your taxes jointly, which may save you both money.
Another thing to hash out is who claims the children as dependents. “Normally the custodial parent will claim the child,” Riskin says, “but it’s not uncommon for the custodial parent to release the exemption to the non-custodial parent, or for parents to alternate years when claiming a child on their taxes.” Claiming a child may allow you to claim other tax credits, too. For example, if you plan on claiming the American Opportunity Tax Credit for your college student, the child must be listed as your dependent on your return, regardless of whether or not you’re the parent paying for the college expenses.
And if you’ve recently gotten divorced, you may be looking for bigger picture financial guidance as you navigate a new budget, manage household expenses, and so much more. If so, The Finance Fixx Coaching program can offer some helpful financial hand-holding (and one-on-one help) to make sure all your bigger goals are on track for saving and retirement.
If You Lost A Spouse
If your beloved passed away this year, you can continue to use the same filing designation you used when they were alive (e.g. married filing jointly) for your taxes, says CPA Sophia Duffy, assistant professor of business planning at The American College of Financial Services.
For the tax years after their death, however, you will need to adjust your filing status. The most financially advantageous is the qualifying widow status, which allows you to claim double the standard deduction of a single status filer. You’re allowed to use that on your tax returns if…
- You qualified for married filing jointly with your spouse for the year they died.
- You didn’t remarry in the tax year in which your spouse died.
- You claim a child (stepchild or adopted child) as a dependent. This does not apply to a foster child.
- You paid more than half of the expenses of maintaining your home.
- Otherwise you’ll need to file as single and/or head of household.
A spouse’s death also affects how you’re taxed if you sell property you inherited, most notably on investment account assets. “You get a step-up in basis on inherited property, which means you’ll pay lower capital gains when you sell the property, compared to what you would have if you sold the property when your spouse was alive,” Duffy says.
If You Added or Subtracted Dependents
A new baby, expanding the family through adoption or taking adult family members (like parents) under your wing are all things that impact how you account for dependents when filling out your tax return.
If you blended a family and added older kids to the household who are still dependents (e.g. full-time college students), look into the Family Tax Credit, which is worth up to $500 per kid. If you had a baby, you’re most likely eligible to receive the child tax credit if you live in the U.S. and your child is an American citizen.
If You Were Caring For Other Family Members
The IRS’s definition of dependent isn’t limited to kiddos. If you’re caring for an elderly parent or another relative with special needs, see if you’re eligible for the deductions and credits for a qualifying dependent, such as the Dependent Care Credit or Credit for Other Dependents. The maximum credit is $500 for each dependent who meets certain conditions, defined here by the IRS.
If You Adopted A Baby
If you expanded your family through an adoption that was finalized in 2022, the Child Adoption Credit may be worth up to $14,890 tax credit per child, depending on your family’s modified adjusted gross income. Parents can only use the credit if they owe federal income taxes. It’s important to note the adoption credit doesn’t apply to adopting a stepchild. However, it is open to grandparents who adopt a grandchild.
If You Re-Joined or Left The Workforce or Started a Side Hustle…
If your one-income household became a two-income one, put some thought into filling out your W-4. Not withholding enough can lead to a lower refund than expected, or worse — owing money to the IRS. Don’t forget to keep withholding in mind for both your state and federal returns as well.
If you started a side hustle, staying in the IRS’s good graces means understanding how you’re compensated. Tax filing can be more complicated if you took on side work and/or any gig for which you received a 1099 (the tax form sent to you and the IRS to indicate how much you were paid for the job). As a “1099 worker” you’re responsible for paying both the employee share of taxes (Social Security and Medicare) and the employer share (FICA). On the plus side, you can write off side hustle-related business expenses whether you itemize or not. (For more see: Do I Have to Pay Taxes on Side Hustle Income?)
If you launched a business you run from your home, Duffy recommends seeing if you can benefit from the home office deduction, which is usually around $5 per square foot of space devoted to running your empire. Another big tax saving is the ability to itemize and deduct qualified business-related purchases, such as office furniture, computers, software, and day-to-day operating expenses. Be sure you save and organize all of your receipts for these business purposes.
Lastly, if you retired this year, be careful about when you claim your Social Security benefits. If you start taking it before you reach full retirement age (which is 67 if you were born after 1960), you’ll permanently reduce your monthly payout.
If You Had a Health Crisis
Medical issues can quickly become tax issues if you don’t follow the IRS’s rules to the letter. The bar is set high for deducting unreimbursed medical expenses — you can only take the deduction if costs exceed 7.5% of your adjusted gross income (AGI). But an adjustment in your filing status — filing as married filing separately instead of married filing jointly — may put that deduction threshold within reach. That said, be sure not to overlook opportunities for financial relief, such as calling to ask to have your bills reduced, or asking for an itemized copy of all charges incurred while you were at the hospital so you can request a line-by-line explanation for all charges (and possibly spot charges that shouldn’t be there!)*
*CUofCO does not provide tax, legal, or investment advice. This message does not represent official tax or legal advice, and you should always consult your tax or legal advisor with questions regarding tax issues.