Yahoo Finance I’m a Tax Planner/Expert: Here’s a Tax Planning Roadmap for 4 Life Events
Big life events, like marriage, the birth of a child, buying a home or a divorce are all major milestones. And while taxes may not be on your mind while experiencing them, considering taxes can make a big difference in your finances.
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Life events such as marriage, having children, and divorce can all impact tax planning by changing income, tax filing status and eligibility for various tax breaks, said Mark Luscombe, JD, LLM, CPA, attorney, principal federal tax analyst for Wolters Kluwer Tax & Accounting.
“All three categories can affect federal income taxes due,” Luscombe said. “Taxpayers should review their form W-4 on file with their employer and update for potential withholding changes based on changes in taxes owed. Taxpayers with income not subject to withholding should also review their quarterly estimated tax payments.”
Here’s what tax experts had to say about a tax planning roadmap for major life events:
Marriage
According to Luscombe, newly married taxpayers would ideally marry before the end of the year to get the tax benefits of married filing jointly tax filing status for the entire year.
“Marriage can hurt the mortgage interest deduction,” he said, noting that the separate limit on mortgages eligible for the mortgage interest deduction for each single taxpayer becomes the same joint limit on a joint return filed after marriage.
In addition, Luscombe noted that care should be taken in selling separate homes following marriage.
“If considering selling a home following marriage, a couple can qualify for double the home sale exclusion if they both live in the home as a principal residence for two of the last five years before the sale,” he added.
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Children
As Luscombe explained, having children can qualify taxpayers for several tax breaks, such as the Child Tax Credit and the Child and Dependent Care Credit.
“Working taxpayers who will need daycare assistance should remember to obtain taxpayer identification numbers from daycare providers to qualify for the Child and Dependent Care Credit,” he said.
He also noted that having children is also a time to start funding a tax-favored 529 plan for college education and a Coverdell Education Savings Account for expenses for elementary and secondary education.
Divorce
Divorce also comes with a unique set of tax issues.
For instance, the tax law considers a child a dependent of the parent who has custody for the greater part of the year, or, if equal custody, to the parent with the higher adjusted gross income, noted Luscombe, adding that the parents can agree to alter this treatment by filing a form 8332.
In addition, he said that dividing up qualified retirement plan assets in a divorce should be done through a Qualified Domestic Relations Order (QDRO) according to the divorce decree so that you avoid taxation at the time of transfer.
“It can be helpful to finalize the divorce after the end of the year to qualify the prior year for another year of the tax benefits of married filing jointly,” he said.
Finally, Luscombe also said that under current law, alimony is no longer taxable to the recipient nor deductible by the payor.
Buying a House
Buying or selling a home also has a few sizable tax planning opportunities, said Brian M. Tullio, JD, LL.M., CFP, wealth manager at Fairway Wealth Management.
First, he said you may benefit more from itemizing your taxes after buying a home, rather than taking the standard deduction.
“Most people will derive a greater tax benefit from the standard deduction, but certain expenses tied to owning a home can be deducted for itemized filers,” Tullio said.
He added that buying a home likely involves taking out a mortgage, and you can deduct the interest you pay on that loan. You can also deduct property taxes, but that amount includes state and local tax deductions, which are capped at $10,000.
“For those homeowners who want to take out a home equity loan to make some improvements to their property, a deduction is available for interest paid on those loans as well,” he added.
Finally, he noted that with home values at record levels, some homeowners may be looking to sell or downsize and capitalize on the increased value of their property.
“Although the gain on your home is subject to capital gains tax, single filers can exclude $250,000 of gain, and couples filing joint can exclude up to $500,000 of gain from tax,” Tullio said, noting that this very valuable tax exclusion only applies to a home you’ve lived in for two out of the past five years before the sale.
“If you’ve made improvements to your home along the way, don’t forget to add the value of those improvements to your cost basis! IRS Publication 523 details what kind of improvements might adjust your cost basis, and ultimately mitigate taxable gain realized at sale,” he added.
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This article originally appeared on GOBankingRates.com: I’m a Tax Planner/Expert: Here’s a Tax Planning Roadmap for 4 Life Events
