By the time most of us finish our taxes, we don’t want to think about them again for a long while. However, that’s exactly what financially savvy taxpayers do! By taking a look at your tax situation before the year is over, you can take advantage of every legal means to reduce the amount you’ll pay in taxes next year.
If you know in advance of looming life changes, events such as marriage, divorce or remarriage, you need to consider the affect of these changes to your tax status. The exemptions claimed on your W-4 may need to be adjusted to prevent an unexpected tax bill. If you are going through a divorce, discussing the tax ramifications of dependents, alimony, childcare or division of property before signing anything is extremely helpful. Divorce decrees often contain wording that has a different tax result than what was intended. Call on your tax professional for a review.
A change in family size with the birth or adoption of a child can also affect your tax return. And, as children get older, you may lose certain credits.
A career change is another life change that might affect your tax situation. If you have pension opportunities that you are not sure about or excludable benefits such as cafeteria plans and dependent care benefits to choose from, your tax professional can help you evaluate your options. A career change might also increase income, shifting you into a higher tax bracket or changing the work-related deductions available, making a change in withholding a possibility.
And, if you find yourself in financial trouble, bankruptcy may be the option you choose. If so, there are tax implications you should be aware of and options that may be available, so contact your tax professional. Time is of the essence if you are in a bankruptcy situation.
Did your company present you with an early retirement proposal or are you considering an early retirement? This event definitely changes your life and your tax situation! It’s better to discuss the options before you act rather than face a large tax bill because you didn’t. Know the tax implications of your decision: check with your tax professional to make sure you are not triggering an early withdrawal penalty or causing Social Security to be taxable.
Of course, it’s important that you’re speaking with someone knowledgeable who can be trusted. The person doing your taxes should be registered with IRS, have passed testing on taxation, and be required to complete continuing education to keep up with the ever-changing tax code. Enrolled agents are licensed by the U.S. Department of Treasury, must report continuing education credits to IRS in order to maintain their licenses and are bound by a code of ethics. You can find one in your area using the “Find an EA” directory at eatax.org.
Last, but not least, if you receive a letter from the IRS, call your enrolled agent! Do not ignore it or toss it in a drawer hoping it will disappear. Putting off action only creates more letters and possibly, larger penalties.
The key word is communication: keep your tax professional informed of any changes in your life because they may change your tax situation.
About Enrolled Agents
Enrolled agents (EAs) are America’s tax experts. They are the only federally-licensed tax practitioners who specialize in taxation and also have unlimited rights to represent taxpayers before the IRS.