Submitted by Northside Tax Service
A lot can happen in a year and with so many recent tax changes, you may be starting to think about what your tax situation will look like.
After its inaugural tax season this past year, Northside Tax Service tax preparers were often asked, “What can I do to make sure I’m ready for next year?” The best way to answer this question is with a question: Have you made any big life changes or decisions in 2021? If so, Northside Tax and their planning services may be able to help.
Life’s Big Changes
A few big changes that may affect your tax situation include buying or selling a home, starting a family, retiring, and having a significant income change, such as getting a new job or promotion, among other things.
With the busy real estate market, many people are buying and selling homes. A common tax implication when selling a home is capital gains tax, which is affected by how long you lived in the home and what your filing status is.
The rise of the gig economy has helped many taxpayers pay their bills during the pandemic. What some don’t realize is that if you work for ride-hailing or delivery companies such as Uber and Instacart, you are considered an independent contractor rather than an employee and with that comes paying self-employment tax.
When the time comes to retire, it’s good idea to reassess your financial and tax portfolio. Investments, pensions, and other retirement plans are most retirees’ main sources of income. Understanding the tax implications of selling stocks and withdrawing from retirement plans can help you avoid paying excess in tax.
These are just a few things that may have happened this year that would change your taxes. Every situation is different, but understanding how major life events affects taxes allows taxpayers to make educated decisions in many areas of their lives.
Choosing the Best Filing Status
Your filing status has a big effect on your taxes and which deductions and credits you qualify for. Life events such as getting married, getting divorced, having children, or losing a spouse can change your filing status. Most of the time, it’s obvious which filing status you fall under, but there are times where more than one may apply and it’s important to understand the implications.
For example, if you’re married, it’s generally more beneficial to file married filing jointly, but there are some cases where taxpayers may benefit from filing separately. If a spouse incorporates a new business, has student loans, or children, there are different tax repercussions and taxpayers should weigh the differences between filing jointly or separately.
What’s Being Withheld?
As an employee, taxpayers are subject to federal withholding and must fill out a W-4 form at the start of their employment. This lets employers know how much tax to withhold from an employee’s paycheck. However, many taxpayers don’t realize that this form should be reviewed when there has been a major change in their life. These changes often come with questions regarding how to complete this form.
To add to the confusion, the IRS revised the W-4 form in 2020, making changes to how people report multiple jobs and account for dependent allowances. Meeting with a professional can help you understand your withholding and give you an idea of how changes to your W-4 will affect your tax return.
Standard vs. Itemized Deduction
The standard deduction is a fixed amount based on your filing status, while itemized deductions looks at certain expenses you can subtract from your Adjusted Gross Income, lowering your tax bill. While most taxpayers use the standard deduction to reduce their taxable income, certain life changes provide a greater benefit from itemizing deductions.
For example, itemizing might be more beneficial in years where you pay substantial interest and taxes on your home, have an increase in uninsured medical expenses, or make large charitable contributions. If a taxpayer is unsure which method is most beneficial for them, Northside’s tax planning service can help them see how both deductions may affect them at them at the end of the year.
With so many life changes and ever-changing tax laws, it’s important to take the time to meet with a tax preparer if taxpayers ever find themselves questioning what their tax situation may look like in the future or of how certain changes may affect them.
Northside Tax Service is located at 1530 Birchwood Avenue Suite D in Bellingham. They are open 9 a.m. to 4 p.m. on Monday–Friday. For more information, check out their website or call (360) 922-0235.