LUTZ BUSINESS INSIGHTS
Big life changes that can save you money in taxes
kelli hesselgesser, senior accountant
Many people put off life events for financial reasons. However, you shouldn’t always let that hinder you. After all, major life events can positively change your tax situation. This blog takes a comprehensive look at six major life changes that could offer potential tax savings.
1. Graduating from College
Did you know that up to $2,500 of interest on student loan payments may be tax-deductible? Your Adjustable Gross Income (AGI) just needs to be below $170,000 for those married and filing jointly and $85,000 for singles.
Equally, you can be eligible for a tax break if your parents made payments, but the student loan was in your name. However, they forfeit their right to claim an exemption for the same if you want the deductions on your tax return.
Once you and your partner tie the knot, you can file your taxes jointly. Doing this can lower your tax liability significantly as there is a lower federal tax rate for filing as a married couple.
You can also benefit from larger tax deductions when file jointly. For instance, the standard deduction for the 2021 tax year increased to $12,550 for singles and $25,100 for married couples.
3. Owning a Home & Selling a Home
Homeownership can trigger several tax changes, whether you are selling or buying. For example, you can typically deduct real estate taxes and mortgage interest up to a certain amount, making your home a great long-term investment. You will also find several tax deductions if you use your home as a rental.
When selling your home, you can also receive tax benefits, depending on how long you owned it and lived there. Up to $250,000 of the sale’s gain is tax-free when filing individually and $500,000 if filing jointly.
4. Having or Adopting a Child
Whether you are having or adopting a child, new parents stand to receive a child tax credit and dependent care credit. In 2021, the Child Tax Credit increased from $2,000 to $3,600 for children under six and $3,000 for those aged 6-17. Parents can also receive a tax credit for their childcare expenses (such as daycare).
5. Sending Your Child to College
You may be eligible for a tax break if you pay your child’s college tuition. If the student is a dependent on your tax return, you can potentially receive credits or deductions related to their education.
However, your child must meet the requirements set by the IRS. These include residency restrictions, income, and age. You are also required to provide more than 50% of the child’s entire support. Tuition money provided to an independent child is, however, not deductible.
Contributing to a retirement account is the most crucial tax deduction available to Americans. You get the opportunity to keep tax-free money and watch it safely grow while you plan for retirement. Also, through a company-sponsored 401(k), your employer will match your contributions.
You could also consider opening an IRA. Once you reach the age of 70 ½, you must take a required minimum distribution (RMD) to avoid hefty penalties. Luckily, you can always use part of the RMD as a qualified charitable distribution. Therefore, you can transfer up to $100,000 to a qualified charity without it being labeled as taxable income.
Get Started with Tax Savings
Don’t be afraid to embrace life changes. Many of these transitions come with big tax benefits. At Lutz, we can help you leverage these life changes to discover tax savings. Contact us today if you have any questions or learn more about our accounting services.
ABOUT THE AUTHOR
KELLI HESSELGESSER + SENIOR ACCOUNTANT
Kelli Hesselgesser is a Senior Accountant at Lutz. She began her career in 2018. She specializes in preparing income tax returns for individuals and businesses. In addition, she provides outsourced accounting services and collaborates with clients to prepare accurate financial data.
AREAS OF FOCUS
- Client Advisory Services
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- Bachelors in Accounting, Hastings College, Hastings, NE
- Big Life Changes That Can Save You Money in Taxes
SIGN UP FOR OUR NEWSLETTERS!
We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.