Most taxpayers will encounter a life-changing event at some point in their lifetime.  Being proactive can result in significant long-term benefits, while avoiding the situation can result in missed opportunities.

Included below are common life-changing events and related taxpayer questions:

  1. Marriage or divorce: How should I adjust my W-4 or estimated tax payments, given my change in marital status?
  2. Buying a primary residence: How will my mortgage payments affect my taxes? We plan to make our prior residence a rental property – how will having a rental property impact our taxes, and what expenses can we claim as tax deductions for this new rental property?
  3. Buying a second residence: Are we allowed tax deductions on a second house?  How do we treat this property on our tax return if we plan to use it part-time as our personal vacation home and part-time as a rental property to others?
  4. Selling your primary residence or a second residence: Will we be subject to income taxes from the capital gain from this house sale?
  5. Having a child: What are the tax benefits of having a child?  Will we be able to claim a portion of our expenses for childcare costs as tax deductions?  What are the tax benefits of opening a 529 College Savings Plan for our newborn child?
  6. Becoming self-employed: What expenses can be claimed as tax deductions?  What are my retirement plan options now that I am no longer included in the retirement plan at my old job?  What do I do with the retirement funds still held at my prior employer’s plan?  How do I determine what to pay for quarterly estimated taxes?
  7. Loss of job and collecting unemployment: Are my unemployment benefits taxable?
  8. Receiving an inheritance or a significant financial gift: Will this income be taxable to me?
  9. Planning to retire in the coming year: How much of my retirement plan distributions (RMDs) and social security benefits received will be included as taxable income on my tax return?  Can I request income taxes to be withheld on this income?  At what age should I begin taking social security benefits?

These are just a sample of life-changing events taxpayers face and related questions that arise.  Whether the impact of the life-changing event is large or small, planning accordingly should improve your chances for a beneficial outcome.  As early as possible, communicate with your advisors for guidance in making prudent decisions.   And with proper planning, you can strive to avoid large tax surprises and to benefit by maximizing your cash flow going forward.