How expected and unexpected changes can affect your finances
Some big money decisions stay on your radar for a long time, like buying your first house, sending your kids off to college, and saving for your retirement. Surprisingly, many Americans either don't know about the basic credits and deductions that exist, or simply don’t take advantage of them when they can. Here are some things to think about.
What's expected: According to industry experts, the average wedding costs about $20,000. But you can probably do it for less (even if you’re getting a little help from the folks).
What might surprise you: Everything changes when you get married, including your taxes. Filing tax returns jointly or separately can pay off differently, especially if you have medical expenses.
What's expected: Two children can cost an average of half a million dollars to raise to the age of 17. And they’re worth every penny, of course.
What might surprise you: If you have kids, you may qualify for the child tax credit, which could cut your tax bill by $1,000. Dig deeper—there are other tax benefits for some tax filers.
What's expected: You lead a long, rich life and leave lots of money to your family and your favorite charities.
What might surprise you: An estate tax kicks in unless you transfer your fortune to a spouse or to a registered charity. Start your estate tax planning early. (For information on how to get started, click here.)
Less Common Events
Divorce: Broken heart and broken bank account
No one ever plans on getting divorced. Divorce will not necessarily get you clear of the IRS if your spouse has fallen behind on tax payments. Some protections have been enacted but this is something to ask your advisor about.
Relocation: A new start, with new tax issues
Moving cities for a great new job can get your career going if you're starting out, or give it second life if you're looking for a change of scenery. Your employer may cover some or all of your expenses in a lump sum. Part of the total may be taxable, while other parts you can write off.
Bottom line: Keep all your receipts and, if you have a choice, try to move to a state with no state income tax. Moving abroad? Get advice from people who’ve done it.
Windfall: Getting a bonus or inheritance?
See if you can get cash into your 401(k) or Roth account to save on income tax. (For more information on IRAs, click here.)
Spouses are completely exempt from inheritance taxes. For others, the tax situation varies from state to state, depending on whether you are a direct descendant, sibling, or other heir.
Laid off: There is an upside
Once you're over the sting, it's time to start planning on what to do next. You may find yourself with a severance package and looking for ways to reduce your taxes as a result. It's tempting to start raiding the 401(k) if you have one but that could hit hard when taxes take a bite. Think about generating some freelance income and you could write off home office and networking expenses.
What's next? Building a budget
Brokerage IRAs (non-FDIC insured) are available through Merrill Edge. Bank IRAs (FDIC insured) are available through Bank of America, N.A.
Merrill Edge is the marketing name for two businesses: Merrill Edge Advisory Center, which offers team-based advice and guidance brokerage services; and a self-directed online investing platform.
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Neither MLPF&S nor Bank of America, N.A. are tax or legal advisors. It is suggested that you consult your personal tax or legal advisor before making tax or legal-related investment decisions.