Each of life’s major milestones brings unique joys and challenges. In addition to profound personal impact, events such as marriage, divorce, birth and death have important financial implications. Tax planning is crucial during these times to ensure you make the most of potential benefits and minimize any adverse effects. Let’s explore how each of these life events can affect your tax situation and the strategies you can employ to navigate them effectively.
Marriage
It’s a joyous occasion that you’ll remember for the rest of your life. (Cue The Carpenters singing “We’ve Only Just Begun” now.) In addition to making a lasting imprint on your life, marriage also brings changes to your tax status. One of the first decisions you’ll make as newlyweds is whether to file taxes jointly or separately. Filing jointly often provides tax benefits, such as a higher standard deduction and eligibility for various tax credits, including the Earned Income Tax Credit and the American Opportunity Tax Credit. However, in some cases, filing separately may be more advantageous, particularly if one spouse has significant medical expenses or miscellaneous deductions.
Tax Tips for Newlyweds
- Update Withholding
Adjust your withholding allowances on your W-4 form to reflect your new marital status. This helps you avoid owing taxes at year-end or overpaying and putting a crimp in your cash flow throughout the year. - Name Changes
Ensure the names on your tax return match those on file with the Social Security Administration to avoid processing delays. - Tax Brackets
Be aware that combining incomes could push you into a higher tax bracket, potentially increasing your overall tax liability. Planning ahead can help mitigate this impact. Talk to one of our tax professionals to analyze your options.
Divorce
Undoing the I-do is also an impactful experience and can be an agonizing process with significant tax implications. One of the primary concerns is the tax treatment of alimony. For divorces finalized after December 31, 2018, alimony payments are no longer deductible by the payer, nor are they considered taxable income to the recipient.
Tax Tips for Divorced Individuals
- Filing Status
Your marital status on December 31 determines your filing status for the entire year. Consider the tax implications of filing as single versus head of household. - Asset Division
The division of assets, including retirement accounts, can have tax consequences. A Qualified Domestic Relations Order (QDRO) is necessary to avoid penalties and taxes when transferring retirement funds. - Dependents
Determine who will claim the children as dependents. This decision affects eligibility for child-related tax credits and deductions.
Birth
The birth of a child brings immense joy and new financial responsibilities. Fortunately, several tax benefits are available to help offset the costs of raising a child.
Tax Tips for New Parents
- Dependent Status
Claiming your child as a dependent on your tax return can significantly reduce your taxable income. - Child Tax Credit
You may be eligible for the Child Tax Credit, which provides up to $2,000 per child under 17, depending on your income. Check here to see if you qualify. - Childcare Expenses
The Child and Dependent Care Credit allows you to claim a portion of childcare expenses if both parents are working or attending school. Find more information here. - Education Savings
Consider contributing to a 529 college savings plan. Contributions grow tax-free, and withdrawals for qualified education expenses are also tax-free.
Death
It’s long been recognized as life’s other certainty besides taxes. Humor aside, the death of a loved one is a difficult time, and it’s made even more complicated and stressful by the financial implications, including tax status changes. Understanding end-of-life tax consequences can help manage the financial burden.
Tax Tips for Survivors
- Final Tax Return
If the decedent appointed an executor (someone to administer the last will and testament), that person is responsible for filing the deceased’s final tax return, covering the period from the beginning of the year until the date of death. - Estate Tax
If the deceased’s estate exceeds the federal estate tax exemption limit ($13.61 million for 2024), the estate may owe federal estate taxes. Keep in mind, however, that some states also impose estate or inheritance taxes. - Inherited Assets
Inherited assets typically receive a step-up in basis, meaning their values are adjusted to the fair market value at the date of death. This adjustment can minimize capital gains taxes if the assets are sold. Talk to a tax professional for details. - Surviving Spouse
A surviving spouse can file as married filing jointly for the year of the spouse’s death, which may offer tax benefits.
Navigating the Journey
Life events like marriage, divorce, birth, and death are significant milestones that require careful tax planning. Understanding the tax implications and taking proactive steps can help you navigate these transitions smoothly and make the most of potential tax benefits. Our accounting firm is here to guide you through these changes, ensuring your financial health is protected and optimized during life’s most important moments. If you have any questions or need personalized advice, don’t hesitate to reach out to our team of experts.