The year 2016 will go down in history for many reasons.
For those who got married, had a baby, went through a divorce, picked up a side gig or were widowed, there are important tax consequences that need to be remembered as well.
You need to let the IRS know of any major changes on your return.Here’s a look at what to do before April 18:
“Marrying, filing jointly, is the best overall status from a tax point of view.”
You got married
Love is a wonderful thing, even according to Uncle Sam. For those who tied the knot last year (right up until Dec. 31), there may be substantial benefits for your taxes.
In general, many couples get a tax break for being married. “Marrying, filing jointly, is the best overall status from a tax point of view,” according to Gil Charney, director at The Tax Institute at H&R Block.
For starters, you’ll both get to take the personal exemption — a $4,050 benefit — which reduces your taxable income by that amount if you file jointly, Charney said, in addition to being able to combine incomes in order to boost contributions to an IRA or a charity and take a deduction.
(Note: Some taxpayers, particularly high-income couples, could be subject to a marriage penalty, meaning that they pay more in taxes than if they were each single.)
Also, be sure to contact the Social Security Administration as well as the IRS so that your records match up, and change your withholding at work from single to married.
You had a baby
That little bundle of joy also has tax benefits. If you had a child in 2016, you qualify for a dependent exemption of $4,050, even if you just welcomed your baby on Dec. 31.
There are other benefits as well, such as the Child Tax Credit worth $1,000 for each child, the Child and Dependent Care Credit worth up to $3,000 for one dependent and $6,000 for two or more (if both parents are working) in addition to the Earned Income Tax Credit, which could mean cash back of up to $6,269 for taxpayers with three or more children and low-to-moderate income.
Again, make sure to have your child’s new Social Security number for your tax forms.
You got divorced
Hashing out a split can get complicated. If you divorced in 2016 — even on Dec. 31 — you should file as single for the tax year, according to LisaGreene-Lewis, a CPA and tax expert at TurboTax.
Then there’s the question of who is eligible to claim the dependents, if there are any. That has important ramifications because of all of those associated credits and deductions that go along with the kids.
The liquidation of assets may create other complicating factors too, which could affect your return. For example, if the family home is very valuable, the tax bill could be very high for the spouse who takes the house. There are also disparities in the tax treatment of the assets in a 401(k) plan vs. other accounts — not to mention the tax implications of any spousal or child support payments. (Generally, alimony is taxable by the recipient and deductible by the payer.)
And if you’ve changed your name, be sure to reconcile that as well.
You picked up a side gig
But the expenses you incur as a result of your side job are also deductible from what you’ve earned — if they are necessary for the business, said Charney.
For example, if you use your car, you can deduct your mileage and upkeep, or if you have a home office, you may be able to deduct a portion of the rent or mortgage interest and utilities as well as a computer or other start-up costs.
Just be sure to keep a careful record of those strictly work-related expenses and account for them on a Schedule C at tax time, Charney said.
You were widowed
There is a little leeway for those who experienced a significant loss last year. If you were widowed, you can still file married jointly for 2016 and get the same tax breaks that married couples do (this is the one exception to the rule that your marriage status at the end of the year dictates your filing status, Charney said).
When a spouse passes away, any inheritance or property worth less than $5,450,000 will also get passed to a surviving spouse without any estate tax penalty. And if a refund is expected, you can still claim it.
In that case, you should complete and file a Statement of Person Claiming Refund Due a Deceased Taxpayer (Form 1310) — although the IRS says it’s not mandatory for a surviving spouse filing a joint return, it’s a good idea to file the form anyway to avoid possible delays,Greene-Lewis said.
Most other changes, including your filing status and Social Security benefits, will occur after the year of death. And for the two years that follow, you can file as a qualifying widower (as long as you have a dependent), which means the tax rates will still be lower than filing single.