Life Changes & Your Taxes

Life changes ultimately have tax consequences, from birth to death. During your lifetime, you may go on to postsecondary education, get married, get divorced, have children, send children to college, buy or sell a home, start a business, contribute to a retirement plan, draw money out of a retirement plan, or change jobs. Here is a list of some life-changing events and their tax implications:

MARRIAGE

  • If you are married on December 31st, you are considered married for the whole year.
  • The standard deduction for married filing jointly is $10,000 for 2005; an additional $1,000 if age 65 or older or blind.
  • When filing, the name and social security number (SSN) of each person must match that on file with the Social Security Administration (SSA).
  • A spouse can never be claimed as a dependent, even if he or she had no income.
  • Each spouse should review and probably change their Form W-4 to reflect the change in filing status.

CHILDREN

  • A child born on December 31 is assumed for tax purposes to have lived with you the entire year.
  • For each qualifying child you can claim an exemption of $3,200 for 2005.
  • You may be eligible for a $1,000 child tax credit for each qualifying child under the age of 17.
  • If both spouses work, are looking for work, or are in school, you may be eligible for the nonrefundable child and dependent care credit for up to two children under age 13 or for a disabled child of any age.
  • You may be able to take a tax credit for qualifying expenses up to $10,630 paid to adopt an eligible child.

HOUSE

  • Points paid when you purchase a home are generally deductible in that year.
  • Mortgage interest and real estate taxes paid on your home are deductible.
  • When you sell your home, and you have owned it for the last 5 years and lived in it for 2 of those years, up to $250,000 ($500,000 for married filing jointly) of the gain may be excluded from taxes.
  • If you have an office in your home that portion of your home is considered business property. Tax must be paid on any depreciation claimed after May 6, 1997.

EDUCATION

  • You may be able to claim a credit of up to $1,500 for qualified tuition and related expenses for each eligible student in the first 2 years of postsecondary education at a qualified institution. This is called the Hope credit.
  • You may be able to claim a credit of up to $2,000 for qualified tuition and related expenses paid for a qualified individual(s) at a qualified institution for postsecondary education. This is called the lifetime learning credit.
  • For child(ren) under age 18 you may be eligible to contribute up to $2,000 a year to a Coverdell education savings account (ESA). The contribution is not deductible, but the money does grow tax-free.
  • Interest on certain U.S. Savings Bonds cashed to finance higher education is tax-free.
  • Taxpayers with student loans can deduct up to $2,500 of their student loan interest as an adjustment to income.
  • You may be able to take an adjustment to income of up to $4,000 for qualified tuition and fees.

JOBS

  • If expenses are incurred which are not reimbursed by your employer, you may be able to claim them as employee business expenses.
  • If you move to take a new job, you may be eligible to claim moving expenses.
  • If you change jobs, and had a pension plan (i.e., 401(k) plan) at your old job, you may be eligible to roll over the value of that plan directly into your new employer’s retirement plan or into a traditional IRA.

INDIVIDUAL RETIREMENT ARRANGEMENTS (IRAs)

  • You may be eligible to contribute up to $4,000 ($4,500 if age 50 or older) a year to a traditional IRA. All or part of the amount may be deductible. This money grows tax free until withdrawn, and then the deductible contributions and interest are taxed. If the money is withdrawn early, it becomes taxable as income, and may also be subject to a 10% additional tax.
  • You may be eligible to contribute up to $4,000 ($4,500 if age 50 or older) a year to a Roth IRA. This money grows tax free and qualified distributions can be withdrawn tax free. If the money is withdrawn early, the interest earned becomes taxable as income and may be subject to a 10% additional tax.
  • If money is withdrawn from an IRA prior to age 59 1/2, a 10% additional tax is assessed unless certain exceptions are met (i.e., first time home buyer).

DIVORCE

  • If you are divorced on December 31, for tax purposes you are considered to be unmarried for the entire year.
  • If divorced, your filing status is single unless you qualify to file as head of household.
  • A noncustodial parent can claim the exemption for a dependent child and the custodial parent may still be eligible to file as head of household. When divorced, be sure to change your Form W-4 to reflect your new filing status.

RETIREMENT

  • Pensions and annuities are generally taxable.
  • You must start withdrawing from a traditional IRA by April 1 of the year following the year you reach age 70 1/2.
  • If one-half of your social security benefits (SSB) plus your other income exceeds $32,000 for married filing joint and $25,000 for all other filing statuses except married filing separate, and you lived with your spouse at any time during the year, a portion of your SSB may be taxable. For married filing separate and living with spouse at any time during the year, the base amount is $0.
  • If you are age 65 or over, and are below certain income limits, you may be eligible for the credit for the elderly or the disabled.
  • When receiving a pension, be sure to have taxes withheld, or make quarterly payments using Form 1040-ES, Estimated Tax For Individuals, so that you do not owe too much tax at the end of the year, and become subject to the penalty for underpayment of estimated tax.

INHERITANCE AND GIFTS

  • Inherited property receives a stepped-up basis to the fair market value (FMV) of the property on the date of the individual’s death.
  • Property received as a gift retains the basis of the donor.
  • An individual can give up to $11,000 (money or property) a year to any other individual tax-free and the person receiving the money or property does not have to report it as income. You must file a gift tax return for any amount over $11,000.