Major life changes are thrilling – but with the excitement of big moves comes responsibilities. In this post, we’ll cover the most common tax implications of marriage, newborns and changing tax residency.
How marriage impacts your taxes
As a general rule, marriage usually delivers a net positive for tax implications – and no matter how you choose to file your taxes as a couple, these two big benefits will always be available to you:
- Give unlimited gifts of cash or property to one another free of gift taxes
- Take advantage of spousal beneficiary options for IRAs to extend the time before Traditional IRA distributions must be taken and eliminate RMDs entirely for Roth IRAs
Determining the best filing status
Depending on your individual incomes and other factors, you may choose to file jointly or separately. While most couples benefit from choosing Married Filing Jointly status, always calculate your total tax liability and potential tax bracket changes for both options to see which is more tax efficient.
Remember that filing jointly may:
- Lower your tax rate
- Allow you to claim education tax credits if one of you were a student
- Allow you to deduct student loan interest (income-based qualification)
- Make it possible to claim credits for children and childcare expenses
Note: The IRS determines your marital status for the entire tax year on December 31st. If you are legally married on that date, you cannot choose Single as a filing status.
Doubling your capital gains exclusion
One of the largest tax breaks associated with marriage is increasing your capital gains exclusion when selling your home from $250k to $500k. This benefit is available whether you file jointly or separately.
Note: If the home was owned by one of you prior to marriage, you must establish the property as your primary residence before you can double the capital gains exclusion. You accomplish this by living in the home together for two years. If you both owned homes prior to marriage, always speak with your accountant before selling one or both of the properties.
For more information, be sure to read Reasons to Speak with Your CPA When Getting Married.
How newborns affect your taxes
Growing your family by one (or maybe two?) this year?
Here’s what you need to do to make sure you’re ready to add a dependent to your return come tax time:
- Don’t wait to apply for a Social Security number for your child. You must have their SSN before filing your return and will need to file an extension if it doesn’t arrive in time.
- If you are not married, or get divorced during the tax year when your child is born, you must determine which parent is allowed to claim the baby according to IRS regulations.
Note: If you are a single filer and this is your first child, be aware that you should be able to change your filing status to Head of Household (HOH). HOH filers are eligible for a larger standard deduction and more favorable tax brackets.
Depending on your income, additional tax breaks and credits may be available, including the Child Tax Credit, Child and Dependent Care Credit and medical expense deductions.
Additionally, your new child is eligible to receive a certain amount in gifts of cash or property from qualifying recipients tax free and you can also open a Qualified Tuition Plan (529 Plan) in their name to take advantage of tax-free growth and distribution for qualified future education expenses.
Moving states during the tax year
Moving to another state means you will be required to manage all required tax filings for both states for the tax year when you made your move.
- Depending on each state’s rules, you may be able to file as a part-year resident in one or both states to avoid double-taxation
- As each state has unique residency formulas, always consult the website of the Department of Revenue for each state to determine your residency status for each state you lived in during the tax year
Tax strategy guidance for your upcoming life changes
Our team believes a tax return should be the result of strategic planning, and never a surprise. By working through your unique situation and understanding your current and future goals, we can help you make the most of major life changes.
Start your journey to tax-efficiency by requesting a free consultation with our team here: online contact form.
