Mar 01, 2019
By Hayley Norton, CPA Manager at Terry Lockridge & Dunn
Too often major life decisions have tax implications attached to them. For the unwary, this can create a large and unexpected tax bill. Here are four examples of major life changes that can have complicated tax implications:
- Changing jobs. Whether it is a new, exciting opportunity or a result of being laid off, a job change is going to affect your tax obligation. The termination of your previous job likely adds additional taxable income in the form of accrued vacation or a severance package. Review how your former employer handles tax withholdings, 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 is 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 if you lived in it for at least two of the previous five years. Any gain above the exemption is subject to the capital gains tax. If the property you are selling is not your primary residence, the capital gains tax applies, and you also must 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 should 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 a big life decision is on the horizon, go in with your eyes open to the potential tax implications. Carefully weigh all your options and seek help before you act. Contact Hayley at firstname.lastname@example.org, or any of the accountants at Terry Lockridge & Dunn for your tax planning needs. They can be reached at 319-364-2945 in Cedar Rapids, or at 319-339-4884 in Iowa City.