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Writing is Taxing

 

 

The Butterfly
Effect

As you know, taxes are paid in throughout the year via withholding and/or estimated taxes. It’s generally best to pay an amount as close to your actual tax liability as possible in order to avoid incurring penalties or giving an interest-free loan to Uncle Sam.

Given that a writer’s income can fluctuate greatly, it can be difficult to figure out how much to pay in during the year. If you’re lucky, your earnings are fairly stable over the years and you can get close without having to run through a complicated and time-consuming computation. But just when you think you’ve got your taxes under control, an event might take place that can affect your tax liability. Some of these events are financial transactions that will have obvious tax consequences. Other events, however, can affect your taxes even though you might not think of them as a financial event.

What are some of these events and how can they affect your taxes?

1) Marriage. After vowing to love, honor, and cherish, be sure to check your withholding and estimated tax payments. Beginning with the year of marriage, a taxpayer’s filing status will change from single to married filing jointly or married filing separate. It is critical for taxpayers who marry in a given tax year to check their withholding and estimated taxes to ensure enough is being withheld or paid in to cover the tax liability under the new filing status. A change can be made to payroll income tax withholding via IRS Form W-4, available at www.irs.gov or through this link: http://www.irs.gov/pub/irs-pdf/fw4.pdf.

It’s a good idea to make the changes in withholding or estimated taxes starting at the beginning of the year in which the marriage is to take place. The change in filing status will apply to all of the income earned during the year, not just the income earned after the wedding taxes place.

2) Birth of a child. The bad news is that it costs about $200,000 to raise a child from birth to age 18. The good news is that the birth of a child gives rise to a dependency exemption for the child, as well as potential child tax credits and dependent care credits, which vary by income level. If your income is very modest, you may even be entitled to the Earned Income Credit, which ranges depending on a taxpayer’s income and the number of children a taxpayer has. Be sure to take these tax benefits into account when computing your withholding or estimated taxes. For the nitty gritty details on these various benefits, see IRS Publication 503 Child and Dependent Care Credit at http://www.irs.gov/pub/irs-pdf/p503.pdf and Publication 596 Earned Income Credit at http://www.irs.gov/pub/irs-pdf/p596.pdf.

3) Child growing up. Generally, once a child turns 13, a taxpayer can no longer claim a dependent care credit for the child. The child tax credit can no longer be claimed beginning the year your child turns 17. Lastly, a child must be under 19, or under 24 if a full-time student, in order to qualify as your dependent child for tax purposes. Losing the dependent exemption will negatively affect your taxes. Be sure to plan accordingly.

Details about the child tax credit can be found in IRS Publication 972 Child Tax Credit at http://www.irs.gov/pub/irs-pdf/p972.pdf. Details about dependent exemptions can be found in IRS Publication 501 Exemptions, Standard Deduction, and Filing Information, available at http://www.irs.gov/pub/irs-pdf/p501.pdf.

4) Caring for a family member. If you find yourself providing a home or support for a family member who earns very little, including your adult child, you may be able to claim a dependent exemption for the family member regardless of the person’s age. The rules are fairly technical and beyond the scope of this article, but you can find them in IRS Publication 501, referenced above.

5) Sale or purchase of a house. Tax law allows for the exclusion of gains on the sale of a home if certain qualifications are met. However, even if you do not have a reportable gain, the sale of a home can still cause tax consequences, as can the purchase of a home. If you are buying your first home, you may find yourself switching from claiming the standard deduction to now claiming itemized deductions for the mortgage inter-   

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