We can never predict what life has for us.
There may be significant milestones and changes that can impact your finances. It may be marriage, a baby, buying a home, changing careers, or nearing retirement. These life changes all have their unique tax considerations. Proper tax planning during these times can help you navigate these transitions more smoothly and maximize your financial well-being.
Here are some tax planning ideas for major life changes:
- Marriage. Marriage changes your tax situation. If you’re recently married or about to get married, consider the following:
- Update Your Filing Status: Choose between filing jointly or separately. Filing jointly often provides more tax benefits due to lower tax rates and increased deductions. Calculate both scenarios to determine which is more advantageous.
- Review Withholding: Update your W-4 with your employer to reflect your new marital status. This will ensure that your withholding accurately reflects your combined income and tax situation.
- Baby: The new member of your family is a life-altering event that also impacts your taxes:
- Claiming Dependents: You can claim a child as a dependent, which could lead to valuable tax credits such as the Child Tax Credit and the Earned Income Tax Credit.
- Childcare Expenses: If you’re returning to work and paying for childcare, you might be eligible for the Child and Dependent Care Credit, which can help offset some of these costs.
- Purchasing a Home: Becoming a homeowner has tax implications:
- Mortgage Interest Deduction: Depending on your income & deductions you may be able to deduct mortgage interest paid on your primary and, in some cases, secondary residence, which can provide substantial tax savings.
- Property Taxes: Property taxes are often deductible, so keep track of these payments for tax purposes.
- Home Office Deduction: If you use a portion of your home exclusively for business purposes (not applicable if you are compensated by W2), you might be eligible for a home office deduction.
- Changing Careers: Transitioning to a new job or career can lead to changes in your tax situation:
- Job Search Expenses: Some job-related expenses, such as resume preparation and travel for interviews, might be deductible if they exceed a certain threshold.
- Approaching Retirement: As you near retirement, strategic tax planning can help you make the most of your savings:
- Social Security Timing: The timing of when you start receiving Social Security benefits can impact the taxes you owe on those benefits. Be aware of the potential tax consequences.
- Required Minimum Distributions (RMDs) for 2023: Once you reach the age of 73 (or 70½ if you were born before July 1, 1949), you’ll need to start taking RMDs from your retirement accounts. Plan for the tax implications of these distributions.
- Estate Planning: This is a critical aspect of your financial journey that affects your loved ones:
- Gift and Estate Taxes: If you plan to gift substantial assets or have a sizable estate, understanding the gift and estate tax thresholds and exemptions is important for tax-efficient transfers.
- Divorce: Divorce can have significant financial and tax ramifications:
- Alimony and Child Support: Understand the tax treatment of alimony (taxable to the recipient, deductible by the payer if the divorce was finalized by the end of 2018) and child support (non-taxable).
- Property Division: The division of property during divorce can have tax consequences. Consult with professionals to ensure equitable and tax-efficient outcomes.
You should seek advice from a tax professional or financial advisor. They can guide you based on your specific circumstances and help you make informed decisions that align with your long-term financial goals. Tax laws can change, so staying informed and proactive is key to optimizing your financial situation during every stage of your life.
A.K. Burton, PC, has experienced accountants who can help you do your tax and estate planning for now and the future changes in your life. Call us at (301) 365-1974 for a consultation.
We serve the Bethesda, Rockville, and Montgomery County, MD area.
*** For more information on marriage and taxes, visit the Tax Policy Center website.