This is the first article in a multi-part series to address the impact of significant life transitions on tax planning. Click here for Part II.
Although preparing your taxes can be a smooth process in some years, significant life transitions can be counted upon to complicate your tax situation eventually. This article won’t delve deeply into each transition—other articles on our website (e.g. regarding divorce) provide greater detail for each transition. But CBM would like to offer the following overview of events that may occur in the lives of many taxpayers.
This will be the first of a two-part series on life transitions and tax planning. Consider contacting one of CBM’s tax professionals if you need assistance with your situation.
Getting Married
Getting married will affect married couples in several significant ways starting with the impact on filing status. Married filing jointly is a filing status that offers a lower tax rate compared to the alternative status: married filing separately. And because the income range is wider within each tax bracket for married couples filing jointly, couples choosing this filing status can earn more income before entering a higher tax bracket. The standard deduction is also noticeably higher for married couples filing jointly ($27,700) than for individuals who take a $13,850 deduction, which can lead to another reduction in taxable income.
Married couples filing jointly finally have greater access to benefits when it comes to tax credits and deductions. The Earned Income Tax Credit, the Child Tax Credit, the Dependent Care Credit and the American Opportunity Credit offer higher benefits for joint filers.
These are not all the benefits for married couples—several opportunities exist in retirement planning and estate/gift tax planning, which we will cover later. But the tax saving opportunities can be significant.
It’s also worth mentioning that marriage has many dimensions and while pursuing tax benefits may seem like the best choice, other considerations such as significant debt held by one partner may make it more advantageous to keep spouses’ finances (and filing status) separated.
Divorce and Tax Planning
Divorce will also impact your filing status. Depending on the timing of your divorce, you might choose to file as single, head of household, or married filing separately. You should also be aware of the tax implications of paying or receiving alimony or child support, as well as the impact of some expiring provisions of the Tax Cuts and Jobs Act. Read more in our articles entitled “Divorce and Tax Planning: Some Important Considerations for Your Divorce” and “Your Divorce and the Expiration of the Tax Cuts and Jobs Act”.
Having Children
As mentioned in the “Getting Married” section above, a series of deductions can cut your tax liability including when you have children. The maximum amount for the Child Tax Credit in 2023 was $2,000 for each qualifying child under age 17 with up to $1,400 being refundable if the credit exceeded your tax liability. The Earned Income Tax Credit is a refundable credit designed for low- to moderate-income working individuals and families; the more qualifying children a couple has, the higher the credit potential.
Parents who need to pay for caregiving for their children so they can work are also eligible for a credit of up to 35% of the qualifying expense. For 2023, the maximum expense amount was $3,000 for a single child and $6,000 for two or more qualifying children.
We will cover details about other specific credits and benefits including an adoption credit, dependent care flexible savings account, filing status for single parents and applicable dependent exemptions in another article.
Buying a Home
Buying a home is a big decision and the associated tax deductions and credits can also be big. First, assuming you hold a mortgage after the purchase, homeowners may deduct the interest paid on a mortgage of up to $750,000 for mortgages taken out after December 15, 2017 (or $375,000 if married filing separately).
Under the Tax Cuts and Jobs Act, the property tax deduction was cut but still lets homeowners deduct up to $10,000 (or $5,000 for those who are married filing separately) for state and local taxes, including property taxes, income taxes or sales taxes.
Some other deductions and credits for those purchasing home include:
- Home office deduction: Self-employed individuals who use a part of their home exclusively for business purposes can deduct certain home expenses. The deduction requires that the home office be the principal place of business.
- Private Mortgage Insurance (PMI) Deduction: Eligible homeowners could deduct mortgage insurance in recent years including through 2021. However, that deduction was not renewed for 2022 or 2023.
- Points Deduction: Points paid to receive a better mortgage rate can usually be deducted during the loan term. In some cases, all points can be deducted in the year they were paid if certain conditions are met.
- Residential Energy Credits: Making energy-efficient improvements to your home may qualify you for certain tax credits. Installing solar panels, solar water heaters and other renewable energy benefits, in particular, can lead to tax savings.
Although several tax deductions and credits are available to homeowners, the homeowner’s income may impact the extent of the benefit. Make sure you understand the details or contact an experienced tax or financial planning professional for assistance.
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In the upcoming Part 2 of our article series on the impact of life transitions on tax planning, we will cover the tax benefits of selling your home, starting or closing a business, retirement and inheritances.
Please contact Angela Prochaska on our online contact form if you need assistance.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from our office in Bethesda, MD.
