Each year, spring heralds the arrival of good things: green gardens, easier wardrobes, and the general warm-weather goodwill of your fellow citizens.
But it can be hard to hang on to that goodwill with the arrival of another springtime visitor: the Taxman. His forms are complicated, the amount he demands can seem unfair, and you can only hope you're prepared for his bill. There is no greater threat to your goodwill, come mid-April, than to find out you owe…a lot.
If you had a big life change or major life event last year, you also may find big changes in what you owe. Know whether you should ramp up contributions to a high interest savings account for next year's tax payments, or if you could be looking forward to a refund to pad that same savings account.
Marriage: Share everything, including taxes?
Getting married may be one of the first "complications"--for better or for worse--that you'll face when working on your taxes. You'll need to choose whether you file individual tax returns or file jointly. Deduction amounts can be different depending on many factors; your decision on how to file is probably best based on which taxpayer status has a smaller tax payment. Plan to figure out your taxes both ways or consult a CPA to find the most advantageous.
New baby? Take advantage of credits, deductions
Adding a child to your household is a veritable garden of tax benefits. You'll benefit from an additional exemption as well as new deductions, which reduce the amount of income you are taxed on, and credits, which reduce your tax bill by a specific dollar amount. In addition to a child tax credit, for example, you probably can deduct some of your child care costs.
You'll likely find that, all other aspects of your life being equal, your tax burden will drop noticeably with a new addition. If you get a refund, the best bet is to deposit it in a savings account with a high interest rate; you'll need that money for diapers … or paying for college!
Tax benefits for buying a home
Like having a child, buying your first home adds substantial expenses to your life--and tax benefits to offset the shock to your budget. The main benefits you'll see only if you have a mortgage: You can deduct the amount you pay in mortgage interest and, if applicable, private mortgage insurance. This benefit is maximized in the early years, when most of your payment goes toward the loan's interest. Over time, as your payments are directed toward principal, you'll see a reduced benefit.
You also can deduct property tax payments--another significant homeowner expense.
Does inheritance bring a big tax bill?
You may have paid attention to the partisan battles over estate tax in late 2010. For all the drama, it's unlikely that any inheritance you received is affected; The New York Times reports that less than one-half of one percent of people who die in 2011 will be affected by estate tax. For 2010, estates have to be worth over $5 million, according to current IRS rules. Moreover, estate tax is paid by the deceased's estate, not by heirs.
You may also know something about gift tax, which currently kicks in on amounts over $13,000 per year. However, any taxes on gifts are usually paid by the giver, not the recipient.
Foreclosure or bankruptcy: Will you be dinged twice?
If you experienced foreclosure or bankruptcy in the last year, your tax situation may have been the last thing on your mind. While forgiven debt can be taxable in some circumstances, you'll find a small silver lining: Debt canceled through bankruptcy is not taxable, as described on the IRS website, and the Mortgage Forgiveness Debt Relief Act of 2007 offers similar assistance to taxpayers who have lost their primary residence through foreclosure.
Retirement: Get ready for the big change
Just as your tax situation changed dramatically with your first full-time job, retiring can bring with it a bumpy year or two of changing tax brackets. Your decreased income may put you in a lower tax bracket with a reduced tax rate. You'll still be paying taxes on the previous year's income, however, so you may not experience an immediate change. And, depending on your retirement-income sources, you may still owe a healthy amount, if you're withdrawing money from a 401(k) or other tax-sheltered account, for example.
Prepare yourself ... and your savings account
To ensure you're prepared, attack your tax forms early in the year. If you find you owe more than you thought, you'll have time to save for taxes by adding to your savings account before taxes are due.
Then you can face tax time--and springtime--with renewed goodwill.