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Major life changes are an exciting and emotional time. But with the positive changes, there can sometimes be challenges too. If you’re facing a change in your life in the near future, have you thought about what the tax implications might be? Below are four examples of life changes that can have complicated effects on taxes that come with them:
Whether it’s a new, exciting opportunity or the result of being laid off, a job change is going to affect your tax obligation. The termination of your previous job likely adds additional taxable income in the form of accrued vacation or a severance package. Review how your former employer handles tax withholdings, especially for big payouts. Your new job also brings new tax implications with a new salary, new benefits and possibly different taxing jurisdictions if you also move to a new location.
The extra money you earn when adding a second job or business also brings extra taxes. How much additional tax this second income creates depends on your specific situation. Employment status, type of business, and how it relates to your other tax activities need to be considered. The extra income alone can send you into a higher tax bracket.
Your retirement plans and timing of retirement plan distributions play a big role in how much tax you will pay on your retirement earnings. For example, with traditional IRAs, there are early withdrawal penalties before you reach age 59½ and required minimum distributions after reaching age 70½ years old. For Social Security, collecting benefits early means less in monthly benefits and potentially a higher tax obligation if you have additional earnings. Each source of retirement income has its own set of taxation rules which can create a very complicated tax environment.
When selling a house or other residential property, the first thing to determine is whether it’s your primary residence. If so, the IRS provides an exemption from tax for up to $250,000 ($500,000 for joint couples) of the gain realized from the sale of your home as long as you lived in it for at least two of the previous five years. Any gain above the exemption is subject to capital gains tax. If the property you are selling is not your primary residence, capital gains tax applies, and you also have to deal with other more complicated tax code issues.
We hope this helps you become more aware of how your tax situation might change in the future based on any decisions you make in your personal or professional life. Always remember to carefully weigh your options and speak with your accountant if you’re unsure about how a future decision will impact your taxes. Contact Cray Kaiser if you have any questions.