Graduating from college, buying a house, becoming a parent, and retiring are all life-altering events. This blog focuses on the potential tax savings that come with these special occasions.
1. GRADUATING FROM COLLEGE
Moving that tassel from one side to the other is a big accomplishment, likely accompanied by debt. If you used a student loan to pay for qualified education expenses like tuition, room and board, and books, you could reduce your taxable income by up to $2,500 of interest paid on student loan payments. If your parents made the payments, but the student loan was in your name, you can still claim the benefit. However, only one person can report the interest paid, so you must decide who will report the expense and receive the benefit. There are limits to this benefit based on your adjusted gross income (AGI). If your income exceeds a certain threshold, your deduction begins to phase out. Once your AGI is high enough, you are ineligible for the deduction. Single taxpayer - Phaseout begins at $70,000 and ends at $85,000. You cannot receive any benefit if your AGI is greater than $85,000. Married Filing Joint taxpayer - Phaseout begins at $145,000 and ends at $175,000. You cannot receive any benefit if your AGI is greater than $175,000. Married filing separate taxpayer - Cannot claim the student loan interest deduction.
2. MARRIAGE
After the gifts have been opened and the wedding photos have been posted, it’s time for the exciting part – changing your tax filing status. You can now check the box for Married Filing Jointly on your Form 1040 (or Married Filing Separate). When filing jointly, the standard deduction increases from $12,950 for singles to $25,900 for married couples for the 2022 tax year.
3. OWNING & SELLING A HOME
Buying/Owning a Home
Once you have the deed to your new home, your tax return will look slightly different. If you are itemizing deductions using Form 1040 Schedule A, you can deduct the property taxes paid. However, you likely won’t be able to deduct the entire amount under current legislation. The Tax Cuts and Jobs Act of 2017 limits the deduction to $10,000 combined from both your property taxes and state and local income taxes. Typically, the largest tax break for homeowners is the interest you pay annually on your mortgage or home equity loan. Your mortgage lender will provide you with a Form 1098 with the amount of interest you paid during the year. That amount gets reported on your 1040 Schedule A.
Home Office Deduction
The home office deduction can also lower your tax liability, but this is only available if you are self-employed and use an area of your home “exclusively and regularly” for work/business purposes. If you don’t qualify, don’t fret. There are many tax breaks available for those that work from home.
Energy-Efficient Home Improvements
Installing energy-efficient home improvements not only helps the planet but might help with your tax bill as well. This blog post dives deeper into the expanded individual residential energy credits you may be eligible for.
Selling Your Home
When it comes time to sell your home, you can exclude up to $250,000 of that gain from your taxable income ($500,000 if married filing joint) if you meet both the ownership and use test. If your profit exceeds the exclusion amount, then the excess needs to be reported as a capital gain on Schedule D of your Form 1040.
4. BECOMING A PARENT
You can’t put a price on the joy of having a child. But you can put a price on clothes, food, diapers, strollers, and car seats. Luckily, new parents stand to receive several tax benefits to keep money in their bank account, regardless of if they adopt or have a biological child. Here are child-related credits parents can take advantage of when filing their 2022 tax returns:
5. SENDING YOUR CHILD TO COLLEGE
In addition to the student loan deduction, there are other tax credits you might be eligible for to lessen the amount you owe Uncle Sam. If your child is still a dependent on your tax return, consider these education credits:
American Opportunity Credit
With a maximum credit of $2,500, the American Opportunity Credit can have a substantial effect on your tax return. This credit is available to students in their first four years of higher education. The credit does begin to phase out once AGI for single taxpayers is above $80,000 ($160,000 for married filing joint taxpayers).
Lifetime Learning Credit
The Lifetime Learning Credit can save you $2,000 and applies to students who have already finished their first four years of higher education and are taking additional courses. It has the same phase-out limits as the American Opportunity Credit. Both credits require the completion of Form 8863. Can I claim the student loan interest deduction, the American Opportunity Credit, and the Lifetime Learning Credit? Yes, you can claim all three benefits on the same return. However, they can’t be for the same student or expenses.
6. RETIREMENT
When the time comes to finally start using that nest egg you’ve worked so hard for, it’s important to know the tax implications of your accounts to avoid hefty penalties. If retirement is a long way off and you are just starting to save, you’ll need to decide what plan is right for you. Here are a few of the most common retirement account types and their tax benefits.
Traditional IRA
With this account, you don’t pay ordinary income tax on the money you contribute. You’ll be taxed when you withdraw the savings at your then-current income tax rate, reducing your taxes in the year you contribute. A traditional IRA requires you to start withdrawing required minimum distributions (RMDs) when you reach age 70 ½. If you don’t make your RMD, you may be subject to a 50% excise tax.
Roth IRA
Unlike the traditional IRA, you pay tax today on the money you contribute, and those funds grow tax-free until you withdraw them. This makes sense if you are in a low tax bracket and further away from retirement. This account doesn’t require RMDs, and your withdrawals in retirement aren’t taxed.
Traditional 401(k)
401(k)s are traditionally offered by employers, whereas people often open IRAs on their own through a broker or bank. Most employers offer a company match, so it makes sense to contribute enough to receive the maximum match. Like a traditional IRA, contributions are tax-free, but you pay tax when it comes time to withdraw funds.
Roth 401(k)
Like a Roth IRA, contributions are taxed at the current rate but tax-free upon distribution.
Social Security
You can start receiving your Social Security retirement benefits as early as age 62. If you delay taking your benefits up to age 70, your benefit will increase. If you have questions about retirement planning, our Lutz Financial experts are here to help.
GET STARTED WITH TAX SAVINGS
Lutz can help you realize the tax savings associated with these life milestones. Contact us today if you have any questions or want to learn more about our accounting services.
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