It All Affects Your Taxes

Whether it’s your first part-time employment in high school or that dream job that you’ve trained and studied all through college for, starting a new career is always a proud, exciting, and perhaps just a little bit scary time. It’s a time of fresh beginnings and opportunities. You’ll be earning a paycheck from an employer (for possibly the first time) and watching helplessly as the government takes its share before it ever gets to you. How much it takes will depend largely on how you fill out one of the first pieces of paper you’ll see when you report for work, the Form W-4, Employee’s Withholding Allowance Certificate. This form will become familiar to you, because with virtually every major change that you’ll experience in life, chances are that you’ll have to address and update your tax situation because of it.

For example, if you’re still in school and this is your first part-time work, you’ll probably be able to claim “exempt” status because your total earnings will be so low, and you can still be claimed as a dependent on your parents’ tax return. But what if you get a full-time job? Once your income goes above the standard deduction amount, you may incur some tax liability and it may be a good idea to adjust your withholding.

If you get married you’ll need another W-4 because your filing status will change. Got kids? More exemptions means another W-4 so that you can bring home more money to keep them fed and diapered. But that’s not all. When April rolls around you’ll find that you may be eligible for a number of tax credits that could reduce your tax burden considerably. There’s the Child Tax Credit and the Earned Income Credit, as well as the Child and Dependent Care Credit if you have to pay someone to look after your kids while you work. If you care for another person other than a child, such as an elderly parent or an incapacitated relative, you might also be able to take this credit.

If you have substantial income from other sources, you’ll probably need to adjust your withholding downward so that you won’t have to pay a ton of cash come tax time. Found more deductions? If you can itemize them, such as the mortgage interest deduction that you’ll be able to take when you buy a home, you may want to adjust your withholding again to reflect your lower tax liability. And don’t forget your student loans; the interest that you pay on those is deductible, too.

If your marriage goes south and ends in divorce, unfortunately, you’ll need to change your filing status once more. That’s right, another W-4. You’ll also have to consider how the splitting of marital assets will affect you, as well as any income which you may gain or lose due to dividends, interest, alimony and child support, and the like. And once the kids fly the coop (Hurray!) there are more adjustments to deductions and withholding that you’ll need to make.

If you’re retiring, you’re probably even happier than the day that the kids finally moved out. However, you’ll have to temper your elation long enough to alter your finances and tax situation again to keep up with the changes. Depending on when and how you take them, your 401(k) and IRA distributions may now be taxable, as well as your Social Security benefits.

You’ll never get away from the tax changes that life occurrences bring. So many things can have an effect on how you’ll be taxed. As long as you’re vigilant concerning your finances and tax circumstances, and get the help of a good tax professional if you need it, you’ll be able to get through with more of your hard-earned money staying in your possession.