Life Changes and Taxes

Answer: Life changes and legislation changes are the two factors that have impact on your tax returns. There are six major life events that can influence your tax situation and are significant milestones to share with your tax professional, attorney, and CERTIFIED FINANCIAL PLANNER™ Professional. The more information each of us has, the  better we can help you work towards your goals in the most efficient and productive manner. 

Diamonds … “I do!” 

For married couples, filing jointly tends to lead to lower taxes and higher deductions, but not always. Make sure the name you use to file matches your Social Security card and update your W-4s. Your trusted team of professionals needs this information to thoughtfully plan for your future, including beneficiary designation updates. 

Divorce … or “I don’t anymore”

The end of a marriage means your filing status will change to single or head of household. If your divorce is finalized in 2024, then you’d file as married filing single or married filing jointly for 2023 even though you’ll be divorced come Tax Day. Dependents can only be claimed by one of you; if you have two children, each spouse could claim one, for example. If you have an odd number of children or can’t agree how to claim dependents, the IRS tends to favor the custodial parent. Plus, only the custodial parent can claim the child tax credit.

Diapers: You welcome a bundle of joy

Kids – whether adopted, biological, step or foster children – come with a bundle of tax breaks for qualifying care costs, education, and the child tax credit. Single parents can file as head of household, which offers better tax rates and a higher standard deduction. 

Downsize, Upsize, or Right-Size 

A home purchase opens up potential deductions on paid points, mortgage interest and property taxes if you itemize. In some cases, there are credits or deductions for home improvements and energy-efficient upgrades. Selling? If you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple filing jointly.

You lose a loved one

The dearly departed still need someone to file a final tax return and also an estate tax return on their behalf. Money left to heirs is income-tax-free at the federal level, with the exception of money withdrawn from an inherited IRA or 401(k) plan account (distributions from qualified accounts have their own rules).

Heirs may also have to pay taxes on gains earned after selling bequeathed stocks and other property. When you inherit property, you get the benefit of what’s called a “stepped-up basis,” which means if you sell the asset, you’ll be taxed only on the gain since the deceased’s date of death, not the gain from the original purchase price. Note: Surviving spouses may still be able to file jointly up to two years afterward, provided they haven’t remarried and meet the other requirements.

Your job changes

New gig? Rethink your W-4. Lose an old one? Unemployment benefits are taxable. Promoted? A raise may mean a higher tax bracket and a chance to adjust your withholdings, as well as dial up your contributions to tax-advantaged retirement accounts. Double-check that the higher income didn’t phase you out of Roth contributions or out of the ability to deduct contributions to a traditional IRA, which changes based on your modified adjusted gross income. Retiring? Distributions from qualified accounts are taxable, so talk to your finance professionals before you make any distribution decisions. 

Life consists of many moving parts that change deliberately or unintentionally. Keeping your team of trusted professionals up to date is important. Stay focused and plan accordingly.