Waiting and Watching

“Life isn’t a matter of milestones, but of moments.”

~ Rose Kennedy

 Question:  As we await word on tax legislation changes from Washington D.C., what can we focus on regarding life events that could impact our federal tax return?

Answer:  Legislation and life are two things guaranteed to change your federal tax situation. While we wait for legislative clarity, there are six major life events that can impact your federal return. These milestones should be shared with your financial team, including your CERTIFIED FINANCIAL PLANNER™ professional and your tax pro as soon as possible to help you find credits and deductions you may qualify for and to help you come up with flexible solutions.

1. You say “I do.” 

For married couples, filing jointly tends to yield 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.

2.… 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 2022, then you’d file as married filing single or married filing jointly for 2021 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.

3. 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. New parents may want to consider a 529 college-savings plan as well; savings grow tax-deferred, and many states offer deductions or credits.

4. You upsize or downsize

A house 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.

5. You lose a loved one

The dearly departed still need someone to file a final tax return (perhaps also an estate tax return) on their behalf. Money left to heirs generally 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.

6. 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. 

Whenever there are changes in your life, it is important to share this information with your team of financial professionals. Stay focused and plan accordingly.

While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. The opinions expressed are those of the writer as of July 1, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance does not guarantee future results. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.