Tax breaks for every life stage


Tax breaks for every life stage

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Changing tax laws aren't the only thing that could throw a monkey-wrench into what you owe (or get back) April 15. When life happens, tax changes typically follow.

"Planning is more and more critical at each of the life stages," said Timothy Gagnon, an assistant academic specialist of accounting at Northeastern University's D'Amore-McKim School of Business. Taxpayers are likely to get better results by planning ahead for changes such as filing as a married couple or retiring, he says, rather than rushing to piece together a strategy afterward—and just before tax time.

These seven life events could trigger substantial tax changes worth talking about with your tax professional.

—By CNBC's Kelli B. Grant
Posted 15 March 2014

Getting Married

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"Hopefully you're not getting married based on tax," said Gagnon. Depending on your situation, this life change could result in a bigger or smaller tax bill.

Marriage bonus: For some taxpayers, marriage cuts their tax bill, particularly if one spouse significantly out-earns the other. In that case, married filing jointly can put more income through at a lower tax rate. For example, someone earning $190,000 would have a top federal tax rate of 33 percent for tax year 2013. With a spouse earning $30,000, the couple's top rate would be 28 percent, thanks to the wider brackets.

Marriage penalty: The other side of the coin. Couples whose incomes are similar are more apt to fall into a higher bracket, owing more taxes than they might when single. The effect is exacerbated if both are high earners. The new additional Medicare tax of 0.9 percent kicks in at $250,000 for married filing jointly, versus $200,000 for individual filers. Some deductions also phase out faster for married couples. For example, two single filers earning $50,000 apiece could take full deductions for IRA contributions made, up to the annual limit. But a couple bringing in $100,000 a year would get only a partial deduction, due to a phase out starting at $95,000 for those married filing jointly.

Maneuvering room: Combining incomes and reducing costs (paying rent on one home instead of two, for example) can give married couples more opportunity to max out tax-advantaged strategies—such as the $17,500 limit on pre-tax 401(k) contributions for 2013 and 2014, said Gagnon. "It allows for a lot more planning," he said.

(Read more: The most common tax surprises for same-sex couples)

Buying a Home

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Purchasing and owning property can result in a bevy of tax breaks, for now at least. Lawmakers have been toying with the idea of eliminating benefits such as the deduction for mortgage interest. "There seems to be a consensus swelling," said Benjamin Tobias, a certified financial planner and certified public accountant based in Plantation, Fla. "We could see some watering down of traditional deductions."

Mortgage-related deductions: IRS Publication 936 notes a number of possible home-related breaks for taxpayers whose loans fit the criteria and who itemize their deductions. (Many phase out for higher-income folks.) The big one: Interest paid on a first or second mortgage up to $1 million in mortgage debt, which for amounts to an average $10,640, according to a 2012 USA Today analysis. Buyers who put down less than 20 percent on their new home and are paying private mortgage insurance may also claim that interest as a deduction. And those who paid down their first or refinanced mortgage interest rate with "points" can often deduct some or all of that fee.

Home equity deductions: If you take out a home equity loan, the interest paid on that loan may be deductible. The IRS caps what can be considered home equity debt at the smaller of $100,000 for married couples filing jointly, or the home's fair market value less any mortgage debt.

Moving deductions: This one's harder to claim. Per IRS provisions, moving costs may be deductible if your move is tied to the start of a new job, and your new workplace is at least 50 miles farther from your old home than your old job was from that home. You'll also need to work full-time for at least 39 weeks during the first year after you move.

Sheltered sale gains: If you sell the home after living in it for at least two years, up to $250,000 in appreciated value ($500,000 for married couples filing jointly) is excluded from your income. "You can pocket that money tax free," said Tobias.

(Read more: The priciest real estate? It's not New York)

Having a Baby

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Raising a child born in 2012 to adulthood will set you back an average $241,080, according to the U.S. Department of Agriculture. Fortunately, there are a few breaks along the way. Right off the bat, you're able to claim an extra exemption, worth $3,900 per child in 2013, said Jeffrey Porter, a certified public accountant in Huntington, W. Va. That reduces your adjusted gross income.

Child tax credit: Taxpayers can claim a credit of up to $1,000 per child age 16 or younger. There are a few qualifiers, including requirements that the child have lived with you for more than half the year. Plus, the credit begins to phase out for married couples filing jointly with modified adjusted gross incomes of $110,000 or more.

Childcare tax benefits: The IRS offers a dependent care credit for children age 12 and younger, worth up to 35 percent of qualifying expenses, up to a maximum $3,000 for one child or $6,000 for two or more. Families may also benefit from signing up for an employer's dependent care accounts, which let them set aside up to $5,000 in pre-tax money for qualified childcare expenses. (Expenses reimbursed from the account don't qualify toward the dependent care credit, however.)

Adoption credits: Families adopting can claim a credit of up to $12,970 per child in tax year 2013, to help offset adoption expenses. The IRS also allows families to exclude any employer-provided adoption assistance from their income, although that will reduce the maximum claimable for the credit. The credit begins to phase out for taxpayers with a modified adjusted gross income of $194,580 or more.

(Read more: The most expensive states for raising children)

Going to College

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The tax breaks of going to college, or sending a child to college, can be substantial—but they still pale compared with the cost. During the 2012-13 academic year, the average cost to attend a private four-year college was $40,261, including tuition, fees, room and board, according to The College Board. For a public four-year college, the total was $18,171.

College savings plans: "To start from scratch, that's a wonderful way of avoiding taxation," Tobias said. Family members can each contribute up to $14,000 per year to a child's 529 college savings plan without incurring gift tax, with those funds growing tax-free. Contributions aren't deductible on your federal taxes, but some states offer deductions or credits for them. Withdrawals for qualified education expenses are tax free. There's a 10 percent penalty for withdrawals for other uses, but if your student is lucky enough to score scholarships, you can withdraw that amount penalty free. Extra savings can also be assigned to a different beneficiary, whether another child or you, for continuing education.

Education credits and deductions: Parents have a number of tax breaks available to them, but you can claim just one—and so experts suggest weighing the various options to see which is most valuable. (All begin to phase out for higher earners.) There's the American Opportunity Credit, which offers up to $2,500 per student for the first four years of college. The Lifetime Learning Credit is worth up to $2,000 for qualified education expenses, with no limit on the number of years it can be claimed. There's also a tuition and fees deduction of up to $4,000

Employer reimbursement: If you're the one going back to school, ask your employer if it offers cash for college tuition or other continuing education. The IRS allows you to receive up to $5,250 of such reimbursements tax free. (If you're also claiming an educational credit or deduction, you can only claim expenses exceeding the limit reimbursed by your employer.) "The challenge we're seeing is, the limit hasn't increased as tuition is going up, so it may not cover much," said Gagnon. "But if you're taking a course or two to refresh your skills, it's phenomenal."

(Read more: Dickering over a college aid offer? You may be sorry)

Getting Divorced

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Uncoupling your finances can have more serious tax complications than combining them. "More often than not, couples going through divorce do not get counsel on the tax effect," said Tobias. "We have seen some real disasters." A common one: Dividing assets in half based on account balance, without first factoring in taxes that would be owed when selling a stock or withdrawing from an IRA. The result, he said, is that even a 50-50 split favors one spouse more than the other.

Alimony: Amounts paid under a divorce decree or separation agreement may be deductible, provided you meet set criteria--including making payments in cash, and the payment is not considered child support. Taxpayers on the receiving end of alimony must report it as taxable income. Taxes won't be withheld from such payments, which could mean the recipient has a bigger-than-expected tax bill.

Marriage penalty. Couples in the process of divorcing who prepare their taxes as married filing separately may face much bigger tax bills, said Gagnon. It's considered the least beneficial filing status, because taxpayers are eligible to claim fewer breaks, while others have a lower threshold to phase out. For example, a married taxpayer filing separately cannot claim the tuition and fees deduction, or child and dependent care credit, among others. His or her deductible IRA contributions start phasing out with a modified adjusted gross income of just $10,000, versus $95,000 for married filing jointly.

Child exemptions: Only one parent can claim the $3,900-per-child exemption mentioned in the having a baby section. That's usually the parent who has custody, but the IRS has Form 8332 if that parent wants to let the other use the exemption come tax time.

Home sales: "Often it is better to have a house sold while the couple is still married, especially if there's a large gain," said Tobias. (As mentioned in the buying a home section, up to $250,000 in home appreciation, $500,000 for married couples, can be received tax free if you've lived in a home for at least two years.) If one spouse gets the home in the divorce and then sells, the lower threshold for single filers could mean they owe taxes on some of the home's price gains.

(Read more: Getting divorced? Get organized first)


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Some of the biggest breaks are those years in the making—pre-tax contributions to 401(k)s and IRAs, Roth accounts that grow tax-free—but tax experts say there are several other tax implications to retirement worth thinking about before leaving the workforce.

Social Security: When you opt to begin taking Social Security has an effect not just on the benefit amount, but potentially how much it's taxed when combined with withdrawals from other retirement accounts and other income, said Porter. Single filers with income between $25,000 and $34,000 may be taxed on up to 50 percent of benefits received; earn more and up to 85 percent of benefits may be taxable. For married couples, benefits begin to be taxed at $32,000 in income.

State breaks: Some states offer small tax breaks for resident seniors. Missouri, for example, has a credit for senior citizens and disabled individuals worth up to $1,100 toward real estate taxes ($750 for rent) paid that year. In Nevada, retirement income and Social Security benefits are not taxed, while New Hampshire offers a $1,200 exemption for residents age 65 and older on taxable dividends and interest.

Retirement rollovers: Tobias said some consumers approaching retirement may find it's beneficial to take IRA funds and roll them over into a Roth, paying the taxes now in order to get tax-free distributions down the line. (You must hold the account for five years.) That hedges against the potential for rising tax rates, and tax implications from taking required account distributions down the line.

(Read more: CNBC '87 percenters' understand the value of saving for retirement)


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It's the last great tax adventure for your finances, and can be a doozy for those who inherit your estate, too. Pass away in 2014, and $5.34 million of your assets are exempt from estate taxes on a federal level. (For taxpayers who died in 2013, the limit is $5.25 million.) "But watch your individual states, because they don't have that high a number," said Gagnon. "You may have a taxable estate at the state level."

Stepped-up basis: "One of the biggest things that I see that drives me crazy is people who give away appreciated assets before they die," said Porter. That puts the recipient on the hook for taxes on those gains. If you bought a stock for $50 per share and it grew to $75, they would owe taxes on that $25 gain. But when appreciated assets are inherited, there's a readjustment in value to the time of inheritance (also called a step-up in basis). Tax-wise, that hypothetical stock would be treated as if the person inheriting it bought the shares for $75 apiece.

Final return: You still owe Uncle Sam an income tax return for the year in which you die. Someone, usually your executor, will have to file on your behalf.

Generation-skipping transfer tax: Bequests made to someone who is at least 37.5 years younger than you (whether you're related to them or not) can be taxable. But there's a fairly high exemption, of $5.34 million in 2014 ($5.25 million in 2013).

(Read more: Where there's a will, there's a way)