5 Major Life Events
That Can Impact Your Taxes
Major life milestones – like getting married, having a baby, or switching jobs – are significant events filled with emotion and adjustment. Perhaps your name, address, or employer will change. Or, maybe the size of your family will be impacted. Whatever the situation may be, life events also come with a host of tax implications that will impact how you prepare and file your taxes. Consider these five major life events and some helpful tips that can help to make your taxes less taxing.
1. Getting Married
Getting married means more than changing your name – it also means changes to your tax preparation.
- Name change. If you changed your name when you got married, it is important to promptly inform the Social Security office. The name on your tax return must match the name on record with Social Security. If not, your return will most likely be delayed while the inconsistency is researched and resolved.
- Filing status. Once you are married, there are only two acceptable tax filing status options – Married Filing Jointly (MFJ) or Married Filing Separately (MFS). Filing category is based on your marital status on December 31 each year, so even if you were unmarried for a majority of the year, filing as Single is not an option if you were married by December 31.
- Withholding. Soon after you are married, both you and your spouse should adjust withholding levels from your paychecks. While withholdings may be divided between you and your spouse as you choose, they are generally more beneficial to the higher income earner. When adjusting withholdings, the overall objective should be to match your joint withholding to the tax amount you anticipate owing for the year. Doing so will help to minimize any year-end tax bill you may receive.
- Itemized versus standard deduction. Taxpayers have the option of either itemizing their deductions, or taking a standard deduction. Married homeowners generally find it more beneficial to itemize because a mortgage deduction can result in a higher total deductible amount than the amount of the standard deduction.
2. Having a Child
There are a number of tax breaks available to help offset the cost associated with raising a child.
- Obtain a Social Security number. While it is not required to apply for a Social Security number until their first job, a Social Security number is required for you to realize any tax benefits associated with having a child. Social Security numbers can be requested at the hospital when they are born, or directly through the Social Security Administration.
- Claiming a dependent. You are entitled to a full dependent deduction, regardless of when during the year your child was born.
- Child credits. If your modified adjusted gross income is below $110,000 for married couples filing jointly ($75,000 for single or head of household; $55,000 for married filing separately), you are eligible to receive up to a $1,000 tax credit from the time your child is born through the age of 16.¹
And baby makes three
Having a first child can be both filled with joy and stress. This brochure can help to ease the stress by giving new parents ideas about what they may need financially for their new child, including investments, insurance, college savings, and estate planning strategies.
3. Death of a Loved One
The death of a loved one is both an emotionally difficult time and a trigger for unique financial and tax considerations.
- Filing status. Generally, if the taxpayer was married at the time of their death, the decedent will file a joint tax return with their surviving spouse. Otherwise, he or she would file as an unmarried individual.
- Final tax return. One of the duties of the estate’s appointed representative is to file various tax returns and ensure that any taxes owed are properly paid.
- Tax attributes. Tax attributes are exemptions, deductions, and carryover items. If the deceased was married, attributes must be allocated to the deceased and surviving spouse, based on ownership and state property laws. Because these provisions can be complex, a tax professional can be a valuable resource.
- Fiduciary tax return. Any income earned by the deceased – both before and after death – is taxable. The final tax return only includes income earned up to the date of death. Any subsequent income from investments, for example, must be itemized on a fiduciary tax return. Due to the time required to properly settle an estate, it is not uncommon for a fiduciary tax return to be filed more than one tax year after death.
- Estate tax. Generally, any estate that pays a federal estate tax must also file a state estate form, and pay a "death tax." State laws vary, so it is recommended that you consult a tax professional for details and specific guidance.
4. Starting a New Job
No matter the reason, switching jobs can create a number of tax implications to be aware of.
- Severance and unemployment pay. Any unemployment income, severance pay, and pay for unused vacation or sick time you may receive is taxable, so it is essential to ensure appropriate withholding levels.
- Job hunting expenses. You may take an itemized deduction for expenses you incur while looking for a new job in your same line of work (excluding your first job). Eligible expenses include the cost to print and mail a resume, fees paid to an employment search agency, and travel costs associated with searching for a job.
- Withholding. When changing jobs, your withholding may jump if you have earned more than the Social Security wage base for the year. For 2016, the 6.2% Social Security tax applies to the first $118,500.² Excess Social Security tax withheld will be returned to you when your tax return is filed for that year.
- Retirement savings. Accessing 401(k) savings before your official retirement age can lead to a 10% early withdrawal penalty tax. In addition, you will be required to pay income tax on any money withdrawn.
Most retirement accounts allow money to be invested before taxes. After retirement, however, all of the funds are subject to income tax.
- Change in tax bracket. For most taxpayers, income levels drop in retirement, so they shift to a lower tax bracket. This change in income tax status may mean that retirees are unable to claim many of the deductions that they were eligible for in the past.
- Roth IRAs. Roth IRAs allow individuals to save post-tax income and receive a tax break during retirement, allowing money to grow tax free. In addition, there are no Required Minimum Distributions (RMDs) associated with Roth IRAs.
- Social Security. Social Security benefits are factored toward taxable income by the Federal government. Depending on your "combined income" level (adjusted gross income plus non-taxable interest earned and half of your Social Security benefits), you may owe Federal income tax on a portion of your Social Security benefits. In addition, if you decide to work while retired and collecting Social Security, your benefits may be taxed if income exceeds certain levels.³
The process of transitioning to retirement can be challenging. The RetirementFolio checklist is designed to help you take the first steps to create and maintain a comprehensive retirement income plan.
- For 2015 and later tax years; TurboTax, 2015.
- Social Security Administration, ssa.gov, 2015
- If wages exceed $15,720 in 2015, you will lose $1 of Social Security benefits for every $2 you earn over that amount.