As you go through life, different types of tax deductions and benefits become available to you. There are eight stages of life that present unique financial considerations, and each stage could also present an opportunity for a particular tax benefit or deduction. Understanding the types of tax benefits and deductions that are offered may help you save money over the years. You'll likely want to talk to a tax professional about your unique situation, but here is some information to keep in mind.
Buying Your First Home
When you buy your first home, you may be able to withdraw up to $10,000 from your individual retirement account (IRA) to use as a down payment without having to pay the 10 percent tax penalty for withdrawing before age 59 1/2. If you have a mortgage, you may be able to deduct home mortgage interest on the first $750,000 ($375,000 if you're married and filing separately) that you owe.
Another possible tax benefit of homeownership is energy-efficient home improvement deductions. Various sorts of upgrades, such as home insulation, exterior doors and windows, certain roofing materials, electric heat pumps and solar panels could qualify for different types of tax deductions and credits.
Finally, if you sell your first home, you may qualify to exclude up to $250,000 of the capital gains from the sale of the house if you're single, and up to $500,000 if you're married.
Entering the Workforce
As you enter the workforce, there can be different types of tax deductions and benefits to help offset your income. Employer-sponsored plans, such as 401(k)s, 403(b)s and IRAs may help reduce your overall tax bracket while adding to your retirement savings. Keep in mind that while Roth 401(k)s and Roth IRAs don't provide an immediate tax deduction, they won't be subject to taxes later on as long as certain requirements are met.
A Health Savings Account (HSA) paired with a high-deductible health plan is another type of tax deduction your employer might offer to help offset taxable income. Contributions are deductible and withdrawals are tax-free as long as they're used for qualified medical expenses. Unlike other types of plans, HSAs are owned by you and accumulate each year.
Planning for College
If you're heading to college, a 529 college savings plan may help you grow your savings tax-free as long as the money is used for qualified higher education expenses. Even though contributions are not tax-deductible, the tax-free benefits may be beneficial for you.
Getting Married & Starting a Family
Potential tax benefits after marriage include larger tax deductions for charitable contributions as well as a higher income threshold for each tax bracket. Also, if either you or your spouse aren't working but the other has enough earned income, the spouse without a job may be able to contribute to an IRA and receive a tax deduction.
If you have a family, you may be able to save more on taxes than as a single person. For example, you may be able to claim a tax credit for childcare expenses. The credit can be up to 35% of your expenses if you qualify. You may also be able to claim the Child Tax Credit if you meet certain qualifications. The maximum credit amount per child is $2,000.
Some people switch careers after entering the workforce. However, this life-altering decision doesn't mean your retirement accounts become taxable. You may be able to move, or roll over, your 401(k) or other employer-sponsored plans to a new job and not incur taxes. Be sure to check with your new employer's human resources department before making any decisions. You may also want to speak with a financial professional to make sure you understand this process.
Retirement presents additional possible tax benefits and deductions. If you're over age 65, and you don't itemize your deductions, you may be able to get a higher standard deduction. Depending on your income level, your Social Security may also not be taxed during your retirement years. Seek assistance from a qualified tax professional before you make any moves.
Leaving a Legacy
If you decide to leave money to your family or to a charity, they may not have to pay any taxes on it. Through the gift of life insurance, your loved ones may be able to receive a tax-free benefit that can be exempt from both income and estate taxes.
Each life stage can bring new opportunities for tax deductions and different types of tax benefits and deductions. By understanding the potential benefits and deductions available to you, you help to maximize your savings throughout your life. For more information, consider seeking the advice of a tax professional.