Navigating Tax Planning for Major Life Events: Marriage, Children, Divorce, and Buying a House
Life events such as marriage, having children, buying a home, or going through a divorce are all major milestones that can have a significant impact on your finances. While these events may not immediately bring taxes to mind, considering the tax implications can make a big difference in how they affect your bottom line.
According to tax experts, these life events can change your income, tax filing status, and eligibility for various tax breaks. Mark Luscombe, JD, LLM, CPA, principal federal tax analyst for Wolters Kluwer Tax & Accounting, advises taxpayers to review their W-4 form with their employer and update it for potential withholding changes based on changes in taxes owed. For those with income not subject to withholding, reviewing quarterly estimated tax payments is also important.
When it comes to marriage, Luscombe recommends marrying before the end of the year to take advantage of the tax benefits of filing jointly for the entire year. However, he notes that marriage can impact the mortgage interest deduction, as the joint limit on mortgages eligible for the deduction becomes the same as the limit for each single taxpayer. Additionally, selling separate homes after marriage can qualify couples for double the home sale exclusion if they both lived in the home as a principal residence for two of the last five years before the sale.
Having children can qualify taxpayers for tax breaks such as the Child Tax Credit and the Child and Dependent Care Credit. Luscombe advises working taxpayers who need daycare assistance to obtain taxpayer identification numbers from daycare providers to qualify for the credit. He also suggests starting to fund tax-favored education savings accounts for college and other educational expenses.
Divorce also comes with its own set of tax issues, including determining which parent can claim a child as a dependent and dividing up qualified retirement plan assets through a Qualified Domestic Relations Order (QDRO) to avoid taxation at the time of transfer. Alimony is no longer taxable to the recipient nor deductible by the payor under current law.
Buying a home presents tax planning opportunities as well. Brian M. Tullio, JD, LL.M., CFP, wealth manager at Fairway Wealth Management, notes that homeowners may benefit from itemizing their taxes after buying a home, especially with deductions for mortgage interest, property taxes, and home equity loan interest. Homeowners looking to sell can exclude up to $250,000 or $500,000 of gain from tax, depending on filing status, if they’ve lived in the home for two out of the past five years before the sale.
Considering the tax implications of these major life events can help you make informed financial decisions and potentially save money in the long run.