Help, taxes! When and how does my tax situation change during my life?

When asking a bunch of people to list their least favorite things, no doubt ‘taxes’ will come up. 

Of course, we all understand that paying taxes is just part of life in most Western countries. Paying taxes on our salary, on owning a car and on our everyday groceries: for the biggest part of our lives, we don’t even think about it too much. 

However, when we’re faced with life changing events, chances are high that your tax-situation might change too. 

In this blog we list a series of life events that impact the amount of taxes you need to pay. 

The good news is: in several cases your taxes will actually decrease or you might even become eligible to claim tax credits.

Note: tax rules differ greatly from country to country. This article will not go into the details of specific countries. If you need help for your specific country, don’t hesitate to contact us! 

YOU’RE IMPACTED BY THE PANDEMIC 

Although this isn’t your typical life changing event, many of us have been financially impacted by the pandemic; People have lost their jobs, bars and restaurants were out of business for a long time – and people have been put on special contributions, for example, the furlough in the United Kingdom (employees were given a temporary absence because of the lack of work and received up to 80% of their salary from the state). 

If your work situation has changed, your tax situation has changed too. Luckily, many countries have come up with financial aid programs, both for entrepreneurs and employees. Reach out to your country’s tax authorities to see if there are regulations or subsidies in place that can help you get through this difficult year.

 

YOU’RE STUDYING

When you’re paying for an education, it can lead to tax benefits. In many countries, the expenses paid for education are deductible when filing your tax statement. 

Take the United States for example. You are eligible to deduct up to $2,500 of your student loan interest on your taxes. Other costs, like the cost paid for obtaining official certifications also deductible from your taxes.

 

YOU’RE BECOMING A DIGITAL NOMAD

As a digital nomad, you work from wherever you manage to pick up a good Wi-Fi-signal, which could be from anywhere in the world. Since you’re not likely to stay at one place for long, chances are high you might keep your official residence in your home country. In that case, you stay taxable there. 

However, there’s more options, even if you don’t have a stable place of residency. More and more countries are offering the possibility of getting (short-term) residency to attract digital nomads. Estonia with its E-residency is the most innovative so far. Where are you going to pay your taxes as a digital nomad? Read more about it in our blog: “Where to go as a remote worker”

 

YOU’RE EMIGRATING

At one point in your life, you might move countries. It’s the dream of many of us to (at least temporarily) live abroad, isn’t it?

First of all, changing your residency changes the country you have to pay taxes to. But that’s not it. Because when you’re officially giving up residency in your home country, you might be faced with extra costs however: The Exit Tax. 

It’s a tax you pay on the value of your assets, as if you had sold them before officially leaving the country. Do you think this could apply to you and do you want to know more about it? Read our Exit Tax Blog

YOU’RE BUYING OR SELLING A HOUSE

Perhaps this is the most well-known tax deduction. As soon as you own a house, you can apply a deduction when filing your taxes. This can include deducting the interest you pay on your mortgage and other real estate taxes. 

Also, when you’re selling your house, in some countries, you can benefit from paying less taxes in case you’re filing jointly (with a partner).

 

YOU’RE MOVING IN TOGETHER

Moving in together not only means your daily routine will change, but most likely something will change with your tax-situation too. 

Perhaps you decide to sign a cohabitation agreement. Depending on where you live, you might have the option or might even be obliged to file a joint tax return with your signifiant other. In some cases filing a joint tax return might give you access to bigger tax allowances (like a rent allowance for example). 

 

YOU’RE GETTING MARRIED

Spending the rest of your days with the love of your life isn’t the only beautiful thing about getting married. Most likely, by filing jointly from now on, your taxes per person will decrease. A remark to be made here is the fact that in some cases, getting married actually does increase your taxes. 

Make sure that you both know what you’re getting yourselves into. How does your prenuptial agreement look like? Which rules apply to married couples in your country? Do you want all of your belongings to become 50% yours and 50% your partner’s? 

Whatever you decide, it will impact your tax situation.

 

YOU’RE GETTING A BABY

Most countires support people who have children when we speak about taxes. In many place, from the day your baby is born you can get a child tax credit. When he or she grows older, the tax benefits extend and apply to their education.

 

YOU’RE GETTING A PROMOTION AT WORK

Things not only go well in your personal life, also at the office you’re flourishing. A promotion implies an increase in your salary, which would most certainly be very welcome. 

However, the wage increase might turn out a little disappointing the moment you check your bank account after the first increased payment has been done. So, what happened here? Most likely, your increased income now falls into a higher tax bracket, in which the percentage of tax is larger. To put it simply: for every extra money you earn, you pay a higher amount of tax.

YOU AND YOUR PARTNER SPLIT UP

The moment you and your partner decide to go your separate ways, taxes are most likely the last thing you want to think about. Unfortunately, it will impact you in case you were filing jointly, owned a house together, were married or had another type of official cohabitation contract. 

It can all be a little overwhelming at this turning point in your life, so make sure you reach out for help when you need it and try to keep communicating as clearly as possible. 

 

YOU LOSE YOUR JOB

When losing your job, most likely your income decreases. However, you could also quit your job to go next level with your own business and you might start earning even more. In both cases however, your taxable income will change. 

In case you earn (a lot) less now, you might be entitled to receive state allowances. Whether you’re entitled to it will be decided upon the percentage with which your income has decreased. Be aware that any allowances depend on the country you’re living in and which allowances they have in place, but always reach out to the tax authorities in your country when you’re facing a significant drop in your income.

 

YOU’RE RECEIVING A HERITAGE

Chances are high that at one point in your life, you’re inheriting a sum of money, whether small or large. Whether and how much you are taxed varies greatly from country to country. Sometimes it depends on how closely you and the decedent were related. Other countries don’t have any inheritance tax at all.

Be aware that besides the money, you can also become taxable over inherited property or other assets.

 

YOU’RE RETIRING

Depending on the country you lived and worked in, your employer would have directly paid for your retirement, or you might have been included in a pension plan. In case you’ve shifted to now being your own boss – which you are if you’re a digital nomad – you hopefully have built up some funds that are going to financially support you once you retire. Although it seems like a far-away thing not likely to impact you in the foreseeable future, make sure you explore your options. In almost all cases, you will have to pay taxes over the distributions you take out from your pension plan.

 

AT THE END..

It’s weird to think about it, but the truth is that there still needs to be a filed tax return in your name in the year you die, which will be done by your personal representative. If you were married, your spouse can file jointly for that year if they wish. 

Depending on the size and composition of the assets you owned, an estate tax return might have to be filed to. It’s the responsibility of your heirs to include the assets they inherited from you in their own tax returns. 

COMMENT

As you see, basically every big change in your life impacts your tax situation.

Very important to realize is that you are the one that’s responsible for reporting these changes in your life to the tax authorities of the country where you’re taxable.

Make sure you do so as soon as possible because in case you’re overpaying, you will have to pay that money back.

An unpleasant surprise you could easily avoid by just staying on top of your own changing situation.

In case you need any help, especially with the more complicated events like becoming a digital nomad or moving countries, don’t hesitate to reach out to us. 

We’re here to help you!

 

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Check out our current services. We are here to guide you and help you navigate through the complex world of International Taxes and Business Structures.

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We hope you have enjoyed this article. If you have any further questions please leave us a message below and we’ll get back to you as soon as we can.

     

    NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.

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