Proposed by Northern Tax Service
A lot can happen in a year and with so many recent tax changes, you might be starting to think about what your tax situation will look like.
After its inaugural tax season last 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 to ask a question: Have you made any important decisions or changes in your life in 2021? If so, Northside Tax and its planning services can help.
The big changes in life
Some big changes that can affect your tax situation include buying or selling a house, starting a family, retirement, and a big change in income, like a new job or promotion, among others.
With the busy real estate market, many people are buying and selling homes. A common tax implication when selling a home is the capital gains tax, which is affected by how long you’ve lived in the home and the status of your return.
The booming odd-job economy has helped many taxpayers pay their bills during the pandemic. What some don’t realize is that if you work for rideshare or delivery companies like Uber and Instacart, you are considered an independent contractor rather than an employee, resulting in the payment of a tax on self-employment.
When the time comes to retire, it’s a good idea to reassess your financial and tax portfolio. Investments, pensions and other retirement plans are the main sources of income for most retirees. Understanding the tax implications of selling stocks and withdrawing from pension plans can help you avoid paying excess taxes.
These are just a few of the things that may have happened this year that would have changed your taxes. Every situation is different, but understanding how big life events affect taxes enables taxpayers to make informed decisions in many areas of their lives.
Choose the best ranking status
Your reporting status has a significant effect on your taxes and the deductions and credits to which you are entitled. Life events such as getting married, divorced, having children, or losing a spouse can change your filing status. Most of the time it is obvious what filing status you are under, but there are times when more than one can apply and it is important to understand the implications.
For example, if you are married, it is usually more beneficial to jointly file a marriage declaration, but there are cases where taxpayers may benefit from a separate declaration. Whether a spouse is starting a new business, has student loans, or has children, the tax implications are different and taxpayers must weigh the differences between joint or separate filing.
What is retained?
As an employee, taxpayers are subject to federal withholding and must complete a W-4 form at the start of their employment. This allows employers to know the amount of tax to be withheld from an employee’s salary. However, many taxpayers do not realize that this form needs to be revised when there has been a major change in their life. These changes are often accompanied by questions about how to complete this form.
To add to the confusion, the IRS revised Form W-4 in 2020, making changes to the way people report multiple jobs and account for dependents’ allowances. Meeting with a professional can help you understand your withholding and give you an idea of ââhow changes to your W-4 will affect your tax return.
Standard deduction vs itemized deduction
The standard deduction is a fixed amount based on your filing status, while the itemized deductions look at certain expenses that you can subtract from your adjusted gross income, thereby lowering your tax bill. While most taxpayers use the standard deduction to reduce their taxable income, some life changes offer a greater benefit in detailing the deductions.
For example, it may be more beneficial to itemize years when you pay substantial interest and taxes on your home, have increased uninsured medical expenses, or make large charitable contributions. If a taxpayer isn’t sure which method is best for them, Northside’s tax planning department can help them see how the two deductions can affect them at the end of the year.
With so many changes in life and ever-changing tax laws, it’s important to take the time to meet with a tax preparer if taxpayers ever wonder what their tax situation might look like in the future or how certain changes might look like. can affect them.
Northside Tax Service is located at 1530 Birchwood Avenue Suite D in Bellingham. They are open from 9 a.m. to 4 p.m. on Monday–Friday. For more information, see their website or call (360) 922-0235.