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Are you going through a big life “first” this year?
Maybe you’ve graduated, landed your first job and are starting to pay back your student loans. Or maybe you’re buying a house or having your first child.
These life “firsts” can be exciting and scary times. But they can also help you save money on your taxes.
Many of them could make you eligible for tax breaks that will reduce the amount of taxes you owe or lower your taxable income. These breaks could come in the form of tax deductions that lower your taxable income, which in turn lowers your tax burden. Or they may be credits that lower the actual amount of taxes you owe.
Read on for some firsts that could mean a lower tax bill.
Moving for a new job
Did you get a new job? Congratulations! If you’re planning to move for your new job, you may be able to deduct some moving costs, provided:
- Your new job is 50 miles or more away from your current location
- You must work full-time for at least the next 39 weeks following your move
Eligible moving costs typically include van rental, packing material, gas and hotel stays. Meals while you’re on the road are not eligible, so be careful not to include those. Be sure to hold on to your receipts so you can document the deductions when you file your federal income tax return.
Repaying your student loans
Life after graduation can come as a bit of a shock, especially when it comes to repaying your student loans. Here’s something that could relieve a little of the sting: You can deduct up to $2,500 worth of interest payments from your student loans on your taxes, if you meet income requirements.
For 2017, you can only qualify for this deduction if your modified adjusted gross income (MAGI) is less than $80,000 if you’re filing single or $165,000 if you’re married filing jointly. The amount of your deduction gets smaller as your income gets greater – between $65,000 and $80,000 for single filers and between $135,000 and $165,000 if you file a joint return.
If you’re just starting out in your career, your income may be on the lower end of the qualifying threshold, so you might qualify for a higher deduction amount.
Opening a traditional IRA
When it comes time to open your first retirement account, you’ll have a variety of options. A traditional IRA is one of them, and you may be eligible to deduct the contributions you make to a traditional IRA.
Keep in mind that traditional IRAs have deduction limits based on your income and filing status. Check the IRS website to see how much you’re allowed to deduct.
You may also opt for a Roth IRA, which works a little differently from traditional IRAs. You can’t deduct contributions to a Roth IRA, but some distributions may be tax-free if you’ve had the IRA for at least five years and you meet certain requirements. For example, you can take money out of your Roth IRA tax-free as early as age 59 and a half, or if you become disabled.
Starting a business or a side hustle
Whether you’re opening a traditional business like a bricks-and-mortar store or just getting serious with your dog-walking or freelance writing side hustle, your new business could help you save on your tax return this year.
You may be able to deduct up to $5,000 worth of business start-up expenses from your gross income.
Additionally, if you have space and equipment in your home that are exclusively dedicated to running your business, it’s possible you could claim a home office deduction depending on the size of your office.
The home office deduction has many layers of complexity, so check out the IRS website to learn the finer details of what counts toward the deduction.
Even if you saved up a big down payment, buying your first home is expensive. It can seem like dollars fly out of your wallet. Filing your taxes could be an opportunity to get some of that money back.
If you are the owner, you may be able to deduct the property taxes you paid in the tax year from your gross income. You may also generally deduct any interest you pay on your mortgage.
Just as with your student loans, the amount you’ll be able to deduct will probably be greatest during your first few years of homeownership since this is when your interest payments will be highest because of amortization.
Finally, if your state or local government issues you a qualified mortgage credit certificate, you may also be eligible to use a portion of your mortgage interest payments toward a tax credit instead. You’ll have to reduce your mortgage interest deduction by the amount of this credit. However, a credit is more powerful than a simple deduction because rather than reducing your taxable income, it reduces your entire tax bill dollar-for-dollar.
Having a baby
Your new baby is one expensive bundle of joy. Luckily, kids are also one of the biggest tax breaks most people are likely to have. Here are some of the ways your precious baby could help you save on your 2017 federal income tax bill:
- You can deduct up to $4,050 from your income as a dependent exemption right off the bat for each qualified dependent.
- If you’re adopting a child, you might be eligible for the adoption tax credit. For 2017, this may allow you to receive a credit on your tax bill for up to $13,750 (per eligible child) worth of adoption-related expenses.
- You may also be able to claim the child tax credit, worth up to $1,000 in 2017 for each qualifying child. This credit reduces your tax bill dollar-for-dollar and is nonrefundable. This means that if your tax bill is smaller than the credit amount, the IRS won’t cut you a check for the difference.
- You may be eligible for the additional child tax credit if you weren’t able to use the full amount of the child tax credit. This credit is refundable, which means the IRS will give you a refund if you qualify.
- The average family spends $9,589 per year on daycare, according to Care.com. That’s a lot, but you can recoup a portion of that cost through the child and dependent care credit. This tax credit works a bit differently. Depending on your income and filing status, you might be able to deduct between 20 percent and 35 percent of your first $3,000 (for one qualifying individual) or $6,000 (for two qualifying individuals) in childcare costs. This credit is also nonrefundable, so if your tax credit is worth more than your tax bill, you won’t be eligible to receive the rest of the credit as a refund. Make sure to get your childcare provider’s address and taxpayer identification number (Social Security number for individuals or Employer Identification Number for businesses) because you’ll need to provide it on your tax return.
Keep in mind that a lot of these deductions and credits have income limitations, so make sure to double-check that you qualify before using them. Credit Karma Tax™ offers a free online tax filing service that helps you identify deductions and credits you may be eligible for by asking you questions about your finances and lifestyle.
Life is full of exciting firsts, and many of them could help you save on your tax bill. Whether you’re starting a new job, a family or a business — or saving for retirement for the first time — you can leverage those firsts to your advantage to potentially pay less in taxes. You can find a lot of information about taxes on the IRS website, or you can consult a tax professional for answers to specific questions.