Life Changes & Your Taxes

Life changes have tax consequences, from birth through death. During your lifetime, you may get a job, go to school, get married, start a business, change jobs, have children, send children to college, buy and/or sell a home, get divorced, contribute to a retirement plan, or draw money out of a retirement plan. Here are some tax implications of certain life-changing events.

MARRIED... OR NOT?

• If you are married as of December 31st of a year, you are considered married for the whole year. Your filing status depends on your marital status.
• The standard deduction for married filing jointly is $11,400 for 2009, with an additional $1,100 for each spouse age 65 or older, or blind.
• For married filing separately, the standard deduction is $5,700 with an additional $1,100 for age 65 or older, or blind.
• If you are single and not head of household, your standard deduction is $5,700 and your additional amount for age 65 or older, or blind is $1,400.
• If you are head of household, your standard deduction is $8,350 and your additional amount is $1,400 for age 65 or older, or blind.  If you are a qualifying widow(er) with dependent child, the standard deduction is $11,400 with an additional amount of $1,100 for age 65 or older, or blind.
• The names and social security numbers (SSNs) of each person on your return must match those on file with the Social Security Administration (SSA). If a name is changed for any reason, it needs to be updated with the SSA.
• A spouse can never be claimed as a dependent even if he or she had no income.
• When newly married, each spouse should review, and probably change, their Form W-4, Employee’s Withholding Allowance Certificate, to reflect the change in filing status.

CHILDREN

• Your 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 a dependent's exemption of $3,650.
• For each qualifying child under the age of 17, you may be eligible for up to a $1,000 child tax credit or additional child tax credit.
• If you and your spouse both work or are looking for work, or if one is in school or disabled, you may be eligible for the nonrefundable child and dependent care credit for 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 $12,150 paid to adopt an eligible child.
• Children who are working cannot claim their own exemption if they qualify to be claimed as a dependent on the parent’s return.

HOMES, BUYING OR SELLING

• The first-time home buyer’s credit has been extended into 2010, and more people will qualify for a tax break.  The qualification period for first-time home buyers to purchase a home and qualify for the credit will continue through April 30, 2010.  First-time home buyers who have not owned a principle residence for 3 years prior to the purchase of a new home will continue to be eligible for a credit of up to $8,000.
• The first-time home buyer’s credit has been expanded so that more homeowners now qualify for a tax break.  People who have owned a home and used it as a principal residence for a 5-consecutive-year period during the 8-year period ending on the date of purchase of a new personal residence may qualify as first-time homebuyers and receive a credit of up to $6,500.  To claim this credit, the taxpayer must have a signed purchase contract for a principal residence in force before May 1, 2010 and must close on their home purchase by June 30, 2010. 
• Mortgage interest and real estate taxes paid on your home are deductible.
• Points paid when you purchase your home are generally deductible in that year.
• When you sell your home that you owned and lived in for 2 of the last 5 years, the gain on the sale of up to $250,000 ($500,000 for married filing jointly) is not taxable.
• If you have an office in your home, that portion of your home is considered business property. If you sell your home, you may be able to exclude the gain on the sale except for the amount of any depreciation claimed after May 6, 1997.

EDUCATION

• The new American Opportunity Credit modifies the Hope credit by making it available to more taxpayers.  The credit now covers the cost of required course materials, and extends the time a student can claim it from two years to four. The credit will allow up to $2,500 of the cost of college tuition and related expenses.
• You may be able to claim the lifetime learning credit of up to $2,000 for qualified tuition and related expenses paid for a qualified individual(s) at an eligible educational institution.
• For each child 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 grows tax free.
• Interest on certain U.S. Savings Bonds cashed to finance higher education may be tax-free.
• Taxpayers paying off student loans can deduct up to $2,500 of student loan interest as an adjustment to income.

JOBS

• If job expenses are incurred and 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)

• For 2009, you may be eligible to contribute up to $5,000 ($6,000 if age 50 or older) a year to a traditional IRA. All or part of the contribution may be deductible. This money grows tax free until withdrawn, and then the deductible contributions and earnings are taxed. If the money is withdrawn early, it becomes taxable as income, and may also be subject to 10% additional tax.
• You may be eligible to contribute up to $5,000 ($6,000 if age 50 or older) a year to a Roth IRA. None of the contribution is deductible. 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 10% additional tax.
• If money is withdrawn from an IRA prior to age 59 ½, an additional 10% tax is assessed unless certain exceptions are met (e.g., buying a home for a first-time home buyer, or withdrawing to pay for qualified education or medical expenses).

• If you are divorced or legally separated as of December 31, for tax purposes you are considered to be unmarried for the entire year.
• If divorced or legally separated, your filing status is single unless you qualify to file as head of household.
• The custodial parent who qualifies as head of household does not lose the filing status by allowing the noncustodial parent to claim the exemption for a dependant child.
• When newly divorced, be sure to change your Form W-4, Employee’s Withholding Allowance Certificate, to reflect your new filing status.

RETIREMENT

• Pensions and annuities are generally taxable when distributed.
• Normally, you must start withdrawing from a traditional IRA by April 1 of the year following the year you reach age 70 1/2. This requirement is waived for 2009.
• If one-half of your social security benefits plus your other income exceeds $32,000 for married filing jointly or $25,000 for all other filing statuses (except married filing separately and you lived with your spouse at any time during the year), a portion of your benefits may be taxable. For married filing separately 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 nonrefundable credit for the elderly or the disabled.
• When receiving a pension, be sure to have taxes withheld, or you may need to make quarterly payments using Form 1040-ES, Estimated Tax for Individuals. That way, you will not owe too much tax at the end of the year and become subject to the penalty for underpayment of estimated tax.

GIFTS AND INHERITANCE

• Property received as a gift retains the basis of the donor.
• Inherited property receives a stepped-up basis to the fair market value (FMV) of the property on the date of the decedent's death.
• Certain inherited property, such as IRAs and pensions, are taxable or have a portion that is taxable when distributed to the beneficiary.
• In 2009, an individual can give up to $13,000 (money or property) during the year to any other individual tax-free.  The person receiving the money or property does not have to report the gift as income. For any amount over $13,000 given to a single individual, the donor must file a gift tax return and any gift tax is the donor’s responsibility.

DEATH

• The same filing requirements that apply to individuals determine if a final income tax return must be filed for the decedent. The personal representative must file the final income tax return of the decedent for the year of death and any returns not filed for preceding years.
• Generally, the surviving spouse can file a joint return with the decedent.
• An estate tax return may also need to be filed.