Yes, we can hear the yawns across the Internet. Taxes. Everyone’s least favorite topic.
But in celebration of this year’s tax season coming to an end, we thought we’d offer some simple tips to get you ready for next year’s season…and seasons to come.
There are certain life transitions every woman should be aware of when it comes to her taxes. Susan Hirshman, CFA, CPA, CFP®, helps us break down five of the most common ones to consider and tips to help you on your way.
There are many questions running through your head as you are about to marry your loved one. But whether you will file “married filing jointly” or "married filing separately" on your taxes? Probably not the first thought that comes to mind when skipping away from the altar hand-in-hand with your new spouse.
“Married filing jointly” is a common answer due to favorable tax rates and benefits, but there are reasons to consider filing separately. Privacy and liability are two such reasons.
Some couples may keep bank accounts and money separate, and filing jointly does not allow for this privacy. Also, filing jointly places responsibility for the whole on both parties, and in certain circumstances, (i.e. one spouse makes significantly less than the other) filing separately may allow for a lower total tax liability.
According to a report by the U.S. Department of Agriculture, parents are looking at spending an estimated $206,000 to $476,000 over the life of a child born in 2009.
Does hearing those numbers make you feel like someone should cut you a break? Well, the government does…in taxes.
The year your child is born, no matter if they are born the last day of the year, they are a dependent. In tax jargon, dependent=deductions in most cases. You may qualify for a variety of credits and other deductions for childcare, education and the like.
3. Buying a Home
People like to give all kinds of advice when it comes to the real estate market: when to buy, where to buy… But when it comes to the other important aspects, like real estate taxes, we typically don’t hear much.
If you were renting before, most likely you didn’t itemize your taxes. Now, because of mortgage interest expenses and real estate taxes, your deductions may be greater than the standard deduction the IRS allows. Also, keep records as you do major improvements to the home, like remodeling, as they are part of your cost basis.
Now this is a life transition that we typically don’t plan for, and like many aspects of divorce, it can get tricky.
There are two key issues here:
- If you have children, who gets to claim them as dependents? The answer is based on time spent in respective residences and the age of the child/children.
- Is your settlement alimony or child support? This should be spelled out in your agreement. The major difference from a tax perspective is that if it’s alimony, then it is a tax deduction for the payor and it's taxable income to the payee.
The good news is more and more women are in this position. The bad news? There are tax issues surrounding such business ventures that you must know.
If you start a business out of your home, there are three basic questions:
- Is it a business or a hobby? If you’re aiming to make a profit, you are the proud owner of a business in the eyes of the IRS.
- Should you incorporate? There are many reasons why you may—the most important being the benefit of limited liability. There are a variety of tax structures so make sure you consult with a tax advisor when you start your business or as it starts to grow.
- Can you (or should you) deduct a portion of your house expenses? Businesses generally get to deduct the full amount of expenses they incur. Home office expenses are a good example of this. But the rules can be complicated and the IRS likes to audit these deductions, so consult with a tax advisor.
Special thanks to Susan Hirshman, CFA, CPA, CFP®. Susan is president of SHE LTD, a consulting firm focused on enhancing the financial literacy of women globally. She was formally a Managing Director, Wealth Strategist with one of the world’s top financial services organization and a CPA with a global accounting firm. Susan is the author of Does this Make My Assets Look Fat?: A Woman’s Guide to Finding Financial Empowerment and Success (St. Martin’s Press). Connect with Susan at www.facebook.com/MyFatAssets and www.twitter.com/myfatassets. Visit www.myfatassets.com for more information.