Major Life Changes Ahead? Read This!
Too often do major life changes have tax implications attached to them. For the unaware, this can create financial stress by blindsiding you with a large and unexpected tax bill. Here are four examples of major changes that can have complicated tax implications:
Switching jobs. Whether it's a new, exciting opportunity or a result of being laid off, a job change is going to affect your tax liabilities. The termination of your previous job may increase your taxable income in the form of accrued vacation, or a severance package. Review how your former employer handles tax withholding, especially for big payouts. Your new job also brings new tax implications with a new salary, new benefits, and possibly different taxing jurisdictions if you also move to a new location.
Selling your house. When selling a house or other residential property, the first thing to determine is whether it's your primary residence. If so, the IRS provides an exemption from tax for up to $250,000 ($500,000 for joint couples) of the gain realized from the sale of your home as long as you lived in it for at least two of the previous five years. Any gain above the exemption is subject to capital gains tax. If the property you are selling is not your primary residence, capital gains tax applies, and you also have to deal with other more complicated tax code issues.
Adding a second job. The extra money you earn when adding a second job or business also brings extra taxes. How much additional tax this second income creates depends on your situation. Employment status, type of business, and how it relates to your other tax activities need to be considered. The extra income alone can send you into a higher tax bracket.
Deciding when to retire. Your retirement plans and timing of retirement plan distributions play a big role in how much tax you will pay on your retirement earnings. For example, with traditional IRAs, there are early withdrawal penalties before you reach age 59½ and required minimum distributions after reaching age 70½ years old. For Social Security, collecting benefits early means less in monthly benefits and potentially a higher tax obligation if you have additional earnings. Each source of retirement income has its own set of taxation rules, which can create a very complicated tax environment.
When big changes are heading your way, be sure you’re up to date on the potential tax implications. Weigh all your options and be prepared for changes to your tax situation. Call 805-496-2828 today to start a tax projection for 2019 today.
