How Tax Planning Changes
with Major Life Events
We all know the saying about death and taxes. But like it or not, the cliché isn’t going away.
Aside from death, getting married and having children are also major life steps that impact taxes. Here are a few general ways these significant events change the way you and your accountant will deal with your tax planning and filing:
If you change your name, you’ll have to notify the Social Security Administration, which will then relay that information to the IRS. This is critical for e-filing. If either of you purchase health care through the Affordable Care Act, you must report your marriage to the Marketplace, as this will impact your healthcare premium tax credit and thereby, your taxes.
When you file as a single person, you only get one exemption. When you file MFJ, you may claim two personal exemptions, one for each person in the partnership. You may need more or less withholding depending upon the income of your new spouse. You should review your W-4 and adjust if needed. Getting married often means buying a home, or selling individual homes that you each owned prior to marriage. This will also significantly impact your taxes.
After you have children, you can then list dependent exemptions on your tax return (generally about $4,000 per child, subject to income limitations), so long as your child is born before 11:59 pm on December 31st of that year. Depending on your income, you may also be eligible for additional credits related to having children, such as the Child Tax Credit or the Additional Child Tax Credit.
Child care costs, including nannies and summer programs may also qualify for tax credits. If you have child care costs you should check with your employer to see if dependent care benefits are available.
Once your child starts college, entirely new terms may apply to your tax return. Make sure you coordinate tax filings with your child to receive the best benefit for the family. Larger tax reductions are often lost when the children file on their own before making a plan with their parents. There are several credits and tax-advantaged savings plans available to help off-set the cost of secondary education.
Any income earned the year in which the individual died is taxable, and these taxes must be paid by the estate or by the individual(s) inheriting the estate. Two tax returns may be required for the year of death. A Form 1040 must be filed for the period of time the individual was alive. A form 1041 may have to be filed for any income that was earned while the assets were part of the estate and before they are transferred to the beneficiaries.
Ownership of any mutual funds and other accounts should be changed over to the heir’s name as soon as possible to avoid having income in the estate.
Inherited IRAs, retirement funds, savings bonds, property and homes all fall under sets of rules that the heir—whether a widow, widower or other family member—will want to carefully understand and ensure everything is reported accurately. Making certain that your beneficiary designations are up-to-date is critical in having your estate divided according to your wishes.
For the specifics on how getting married, having children and dealing with death can impact your taxes, reach out to Amatics and schedule a consultation. Our associates have dealt extensively with each of these areas of tax planning and are here to help you through each of these major life events.