Key Life Changes That Affect Your Tax Filings

Most milestones in life come with a celebration, gifts, and, at the very least, some new emotions and memories. And while it may not initially cross your mind, those life changes also affect your tax status.

However, amidst all the excitement and possible stress of transitioning into these new chapters, you might not consider the changes you also must (or at least should) make when filing your taxes once the season rolls around. 

For individuals, families, and business owners in New York, New Jersey, and Connecticut, everyday life changes can lead to multi-state tax implications.

Keep reading to see what life changes affect your taxes and the steps you should take if you’re checking off these milestones.

Five Life Changes That Impact Your Taxes

1. Changing Marital Status

If you end your calendar year by tying the knot—or severing it—you likely need to change the status under which you file your taxes. It also impacts your tax rates, deductions, and available credits.

If You Get Married

If you were legally married by December 31st, you can choose to file your taxes one of two ways: Married Filing Jointly or Married Filing Separately. The status you choose will depend on a few things, with one typically being more beneficial than the other.

Married Filing Jointly can be more beneficial if:

• You and your spouse have very different incomes

• You want to take advantage of larger deductions and credits related to education, medical expenses, and child care

Married Filing Separately can be more beneficial if:

• You both are high earners

• One of you is on an income-driven student loan payment plan

• One of you has a large amount of out-of-pocket medical debt

Remember that how you file also affects other factors like State and Local TAX (SALT), as well as the way you claim deductions (standard versus itemized).

If You Get Divorced

Separating from your legal partner means you’ll also have to make some adjustments before tax season. 

Right after your divorce becomes official, you’ll want to:

• Update your W4 with your employer to avoid over- or underpaying taxes

• Update your filing status (Single or Head of Household)

• Determine who is claiming any children you share (only one parent can claim a child)

And speaking of kids…

2. Having Children

Becoming parents comes with increased expenses, but it also allows you to take advantage of significant tax deductions and credits. 

These can include:

• Child Tax Credit: Up to $2,200 per qualifying child 

• Additional Child Tax Credit: Up to $1,700 per qualifying child

• Adoption Tax Credit: Up to $17,280 per qualifying child

• Child Care Credit: If you pay someone to care for a qualifying dependent

The amount you can earn credit for is dependent on your income and whether you meet the specific qualifications.

When you consider the high childcare costs that come with living in New York, New Jersey, and Connecticut, these are tax factors you’ll want to plan for as soon as possible. 

3. Job Changes

Did you make the decision to become self-employed, take on a side gig, or transition into a higher-paying role? Those all come with some important tax implications.

If You Switch Jobs:

Moving into a role with a higher salary or more benefits can require some strategic tax planning to avoid surprises later on. This applies if you:

• Move tax brackets: Higher salaries mean higher tax liabilities.

• Earn bonuses or incentives: You need to withhold the proper amount of tax.

• Received severance pay: This could push you into a new tax bracket without you realizing it.

• Work in a different state than you live in: Withholding errors are common across state lines.

If You Become Self-Employed:

Whether you become self-employed full-time or take on side hustles, you’ll have to make sure you’re not ignoring your tax obligations. This includes:

• Withholding enough tax: Self-employed taxes from 1099s aren’t automatically deducted like W2 incomes.

• Tracking expenses: You can deduct eligible expenses for running your business.

• Paying on time: Self-employed people often need to file and pay taxes quarterly, not just annually.

4. Moving States

Relocating across state lines can be stressful enough, but things can become even more complicated when you add tax planning into the mix. Even seemingly short-distance moves like Long Island to Connecticut or New Jersey to Manhattan can have big impacts.

Residency and Taxes

Moving during the year means you’ll likely file a part-year return in both states. That means you’ll:

• Allocate income based on when and where it was earned

• Prorate certain deductions and credits

• Track the exact date your residency changed

New York, in particular, has strict residency rules, distinguishing between your permanent home (domicile) and any residence where you spend more than 183 days (statutory residence). This especially applies to remote workers who work for employers based in NYS. Even after moving, you could still owe New York tax depending on your circumstances.

Double Taxation 

Obviously, you don’t want to end up owing the same money twice. You can take advantage of certain tax reciprocity agreements and credits to avoid paying two states if you work in one while living in another or move mid-year.

Since NY, NJ, and CT have different tax laws and rates, you’ll need to carefully plan post-move.

5. Retirement

Finally reaching retirement is one of the most joyous times of your life, and it’s vital to adjust your tax strategy as your income changes.

Before retiring, you should consider:

• Maximizing your 401(k) and IRA contributions

• Taking advantage of catch-up contributions (age 50+)

• Evaluating Roth IRA or Roth conversion strategies

• Timing any bonuses or large income events before retirement

• Planning the sequence of future withdrawals

Remember that Social Security benefits may still be subject to taxes, and you may be required to begin taking Required Minimum Distributions once you reach a certain age. Since where you live can have an impact pension and retirement income, you’ll want to work with a tax expert to best set yourself up for success.

AVM DeMars is Your Tri-State Tax Partner

Looking forward to a big milestone? Suddenly switching to a new job? Don’t forget to account for the tax aspects.

The team at AVM DeMars offers decades of combined experience helping our clients strategically plan for their taxes at every stage of life. We diligently work to ensure you take advantage of all applicable credits and deductions and act as your partner to plan for the future. 

Contact us today to get started.