- Buying a house
- Having or adopting children
- Getting divorced
- Death of spouse
Throughout your life, there will be certain significant occasions that will affect not only your everyday life, but also your taxes. Here are some of these events:
Marriage– If you have just married or are thinking of getting married, you need to be aware that once you are married, you will no longer make statements using bachelor status and will generally make a statement combined with your new spouse using the Joint Married Filing (MFJ) status. When you file the MFJ, the entire income of both spouses is combined into a statement, and when both spouses have substantial income, this may mean that their combined incomes can put you in a higher tax range. However, when submitting the MFJ, you also benefit from claiming a standard deduction equal to twice the standard deduction for a single contributor. It may be appropriate for a couple who are planning a wedding, or even for those who have just married, to estimate the differences of declaration as single and married so that there are no unpleasant surprises at the time of the tax return.
Be aware that the status of the registration is determined on the last day of the fiscal year, so no matter when you get married during the year, you will be considered married all year round for tax purposes. Once married, here are some tasks to do:
- Notify the Social Security Administration − Report any name changes to the Social Security Administration so that your name and SSN match when you file your next tax return. Informing the SSA of a name change is quite simple and can be done on the SSA . Alternatively, you can call the SSA at 800-772-1213 or visit a local SSA office. Your income tax refund may be deferred if it is discovered that your name and SSN do not match at the time your statement is filed.
- Notify the IRS – If you have a new address, you must notify the IRS by filling out and submitting Form 8822, Change of Address.
- Notify the U.S. Postal Service – You must also notify the U.S. Postal Service of any change of address so that any correspondence from the IRS or state tax agency can be forwarded to your correct address.
- Notify the health insurance market – If one or both are obtaining health insurance through a government health insurance market, your combined incomes and the change in family size can reduce the amount of the premium tax credit to which you would be entitled, requiring a return of some or all of the credits applied in advance to reduce your monthly premiums. Even more complicated, if one or both are included in their parents’ market policy, these insurance premiums should be allocated from their return to their return.
Here are some tax-related items that you should be aware of when filling out a joint statement:
- Past Responsibilities of the New Spouse – If your new spouse owes back taxes, past state income tax liabilities or overdue alimony or has unemployment debts to a state, the IRS will apply your future joint repayments to pay off those debts. If you are not responsible for your spouse’s debt and do not want your share of any tax refund to be used to pay off your spouse’s previous debts, you have the right to request your share of the refund back to the IRS by filling out a “injured spouse” allocation form. . Alternatively, you can archive separately using the archive status “separate married file”; however, this usually results in a higher overall tax.
- Capital loss limitations – If an individual has sold shares or other investment properties at a loss by declaring as single, each individual can deduct up to $3,000 of capital losses on their tax return for a combined possible total of $6,000, but a couple is limited to a single loss of $3,000 and, if they get married separately, the limit is $1,500 each.
- Marital IRA – Contributions to “marital IRAs” are available to married taxpayers who file together when one of the spouses has little or no compensation; the deduction is limited to less than 100% of the paid spouse’s remuneration or $6,000 (2022) for the spouse’s IRA. This allows for a combined annual IRA contribution limit of a given amount (up to $12,000 for 2022). The maximum amount is $7,000 if you or your spouse are 50 years or older ($14,000 if both are over 50). However, the deduction of contributions to the IRAs of both spouses may be even more limited if one of the spouses is covered by the employer’s retirement plan.
- Deductions – The standard deduction in 2022 for a couple (both spouses under 65) is $25,900 and for a single individual is $12,950. Therefore, if both are making the standard deduction, there is no loss in the deductions. However, if in the last few years one of you had enough deductions to discriminate and the other made the standard deduction, and after the marriage you file together, you would have to make the standard joint or discriminate deduction, which will likely result in a loss of some amount of deductions.
- Impact on Parent Returns – If your parents have claimed any of you as dependent, they will often lose that benefit. In addition, if you are in college and qualify for one of the educational credits, these credits will only be deductible on the return where your personal exemption is used. This usually means that your parents won’t be able to claim educational credits, even if they pay tuition. On the other hand, unless your income is too high, you can claim the credit even if your parents have paid the tuition.
Buying a house– Buying a house, especially your first home, can be a difficult experience. Without an owner to take care of repairs and maintenance of the property, these tasks will become your responsibility as a homeowner. When you rent, you are responsible for making a rental payment that is not deductible. On the other hand, when you own a house, in addition to being responsible for its maintenance, you have to pay for home insurance, mortgage, and Property Taxes. While routine maintenance costs are not deductible, mortgage interest and property taxes you pay can be deductible, providing significant savings in income tax. However, if the default deduction amount for your filing status exceeds the total of all itemized deductions that the law allows you to claim, you will not receive a tax benefit from the mortgage interest on the house and property tax payments. Therefore, when finding out if you can afford a home, consider whether you will benefit from these house-related tax savings.
Also consider the long-term benefits of homeownership. Homes have generally valued in the past, so you can expect your home to gain value and, when selling it, the gain of up to $250,000 ($500,000 for a couple) can be excluded from the income if the property is owned and used as your main residence for 2 of the 5 years immediately preceding the sale.
Many taxpayers do not feel the need to keep records of home improvements, thinking that the potential gain will never exceed the exclusion amount for home earnings ($250,000 or $500,000 if both the declarant and the spouse qualify) if they meet the 2-out-of-5-year use and property tests. Here are some situations where having records of home improvements can save taxes:
(1) The house is owned for a long period of time, and the combination of valuation due to inflation and improvements exceeds the value of the exclusion.
(2) The house is converted into rental property, and the cost and improvements of the house are necessary to establish the depreciable base of the property.
(3) The house is converted into a second residence, and the exclusion may not apply to the sale.
(4) You suffer a loss of accident and keep the house after making the repairs.
(5) The house is sold before meeting the 2-year property and use requirements.
(6) The house only qualifies for a reduced exclusion because the house is sold before meeting the 2-year property and use requirements.
(7) One of the spouses keeps the house after divorce and is only entitled to a $250,000 exclusion instead of the $500,000 exclusion available to couples.
(8) There are future changes in tax legislation that may affect exclusion amounts.
Everyone hates keeping records, but consider the consequences if you have a gain and a portion of it can’t be deleted. You will be hit by capital gains (CG), and there is a good chance that the CG tax rate will be higher than normal simply because the gain pushed you to a higher CG tax range.
Having or adopting children– In addition to loss of sleep, diaper change, feeding in the middle of the night and constant attention, a newborn also brings some tax benefits, including a maximum tax credit of $2,000 for children, which can greatly help reduce their tax liability. If both spouses work, you will no doubt incur childcare expenses that can result in a maximum credit (may be less) of $600 to $1,050 for a child or double that amount for two or more children. Credit amounts are based on a maximum childcare expense of $3,000 for a child and $6,000 for two or more, multiplied by 20 to 35 percent of the expense based on the taxpayer’s income. (The figures indicated apply to 2022; there were temporary increases in credits as part of the covid pandemic relief for 2021. Congress can extend enhanced credits.)
Obviously, medical expenses are deductible if you detail your deductions, but only to the extent that medical expenses exceed 7.5% of your adjusted gross income. Although rarely found, a surrogate mother’s expense is not deductible.
If you adopt a child under the age of 18 or a natural or mentally unable person to take care of yourself, you may be entitled to a tax credit for qualifying adoption expenses that you have paid. The credit, which has a maximum of $14,890 for 2022, is non-refundable, but if the credit is higher than income tax, you can transfer the excess and have 5 years to use the credit. If the child is a child with special needs, the total credit limit will be allowed for the fiscal year in which the adoption becomes final, regardless of whether you have qualifying adoption expenses. Credit is extinguished for higher-income taxpayers.
It is also time to start planning the child’s future education. The tax code offers two tax-exempt savings accounts, the Coverdell account which allows a maximum contribution of $2,000 a year, and the Qualified State Tuition plan, more commonly called the Sec 529 plan, which allows large amounts of money to be set aside for a child’s education. There is no federal tax deduction to contribute to any of these programs, but the gains from the plans are tax-free if used for qualified education expenses, so the sooner the funds are contributed, the greater the benefit of tax-free earnings.
Getting Divorced– If you’re recently divorced or are considering a divorce, you’ll have to deal with or plan significant tax issues such as asset splits, child support, and income tax return status. If you have children, additional issues include child support; claim of children as dependents; tax credits for children, daycare centers, and education; and maybe even the earned income tax credit. Here are some details:
- Archiving status– As mentioned earlier, your archiving status is based on your marital status at the end of the year. If, on December 31, you are in divorce proceedings but are not yet divorced, your options are to file together or each spouse submit a marriage declaration separately. There is an exception to this rule if a couple is separated during all the last 6 months of the year and if a taxpayer has paid more than half the cost of maintaining a family for a qualified child. In this situation, this spouse can use the most favorable head of family registration status. If each spouse meets the criteria for this exception, both may present themselves as heads of family; otherwise, the spouse who does not qualify must use the married condition separately. If your divorce has been finalized and if you haven’t remarried,
- Alimony – It is the child support for the taxpayer’s children provided by the non-guardian father to the guardian. It is not deductible by those who make the payments and is not income for the beneficiary parent.
- Child Dependency – When a court grants physical custody of a child to a parent, the tax law is very specific in granting that child dependence to the parent who has physical custody, regardless of the amount of child support that the other parent provides. However, the guardian parent can release this dependency to the non-guardian parent by filling out the appropriate IRS form.
- Child Tax Credit – A federal credit of $2,000 is allowed for every child under the age of 17. This credit goes to the parent who declares the child as dependent. Up to $1,400 of the credit is refundable if the credit exceeds the tax due. However, this credit is extinguished for high-income parents, starting at $200,000 for single parents.
- Maintenance – For divorce agreements finalized after 2018, maintenance is not deductible by the payer and is not taxable income for the recipient. As the beneficiary is not declaring alimony income, he cannot treat it as income for IRA contribution purposes.
- Tuition credit – If a child qualifies for one of two higher education tax credits (the American Opportunity Tax Credit [AOTC] or lifetime learning credit), the credit goes to anyone who claims the child as dependent, even if the other spouse or someone else is paying the tuition and other qualifying expenses.
Spouse’s Death – Losing a spouse is emotionally difficult and unfortunately may come with a number of tax issues that may or may not apply to the surviving spouse. Here is an overview of some of the most frequent issues:
- Filing situation – If a spouse dies during the year, the surviving spouse can still file a joint declaration for that year if the surviving spouse has not remarried. However, after the year of death, the surviving spouse will no longer be able to file together with the deceased spouse and will have to use a less favorable filing status.
- Notification – If the deceased spouse is receiving Social Security benefits, the Social Security Administration should be immediately notified. Similarly, taxpayers of pensions and retirement plans of the deceased spouse need to be informed of the death of the spouse.
- Property tax – When the deceased spouse’s property and previous reportable gifts exceed the current lifetime inheritance exclusion ($12.06 million for deaths in 2022), a property tax return may be required. However, the exclusion of lifetime inheritance may be changed at the discretion of Congress. Even when an inheritance tax return is not required because the inheritance value of the deceased spouse is less than the amount of the exclusion, it may be appropriate to file the inheritance tax return anyway, as there may be an impact on the inheritance tax of the spouse survivor when he or she passes.
- Inherited Basis – Under normal circumstances, the beneficiary of the deceased’s assets will have a taxable base on those goods equal to the fair market value of the goods on the date of death. Thus, a qualified valuation of the assets is usually required. However, for a surviving spouse, this can be more complicated depending on whether the state of residence is a community-owned state and how the title of the property was maintained.
- Securities Change – The title of all assets held together needs to be changed only to the survivor’s name to avoid complications in the future.
- Trust Income Tax Returns – Many couples have created living trusts that, while both are alive, do not require a separate tax return to be filed for trust and can be revoked. But with the death of one of the spouses, this trust can be divided into two trusts, one of which remains revocable and the other irrevocable. A separate income tax return for the latter will usually have to be prepared and filed annually.
These are just some of the issues that should be addressed after the death of a spouse, and it may be appropriate to seek professional help.
If you have questions about the tax impact of any of your life-changing situations, call this office for assistance.