Don't Mess With Taxes

Saying "I do" also means saying hello to some tax changes in your new wedded life. (Photo by Jakob Owens on Unsplash)

The end of each year is a good time to reflect on what happened the previous 12 months. For most of us, that includes some good events, some sad ones, and some still shaking out as we’re about to enter a brand new year.

Many of these changes also could affect our taxes.

So, as a bit of year-end preplanning, here are six ways that the Internal Revenue Code shows up when we encounter personal and lifestyle changes.

In many cases, the tax effects are positive. In others, while not necessarily bad, they are a surprise. And in most cases, there's not a lot we can do to alter Uncle Sam's intrusion.

But it's always good to at least know about the potential tax ramifications of our major life events.

1. Getting your first job. The best thing about getting your first full-time paying job is the money. The worst thing is that you have to share some of that income with Uncle Sam. There are income, both federal and, for folks in most of the United States, state and sometimes local taxes that come out of our paychecks before we even get them.

There also are payroll taxes established by the Federal Insurance Contributions Act, or FICA. These employer-employee shared automatic pay-ins support Social Security and Medicare benefits you’ll get after you’re done with work days.

They are set at a total of 15.3 percent of your pay, with 12.4 percent going to the government retirement benefits program and 2.9 percent to medical coverage for when you're older. Your boss pays half of each Social Security and Medicare payroll tax amounts. You pay the other half.

You don’t have any control over the FICA amounts, but you can adjust your income tax withholding to make sure that the proper amount is being taken out of each paycheck.

If you have too much withheld, you'll get a refund when you file. That's not necessarily bad, but you could have that money — your own money — year-round as a bit more in each paycheck. On the other hand, if you don't have enough withheld, you could face an unexpected tax bill at filing time. That also means possible underwithholding penalties.

My post How to get your tax withholding just right has more on this process. You also can use the Internal Revenue Service’s online Tax Withholding Estimator to run the numbers to determine your correct amount.

Finally, don't forget your job's benefits. Many workplaces offer tax-favored employee perks, ranging from health insurance and associated medical flexible spending accounts (FSAs) to educational and adoption financial assistance to 401(k) retirement plans.

And while this is all new and exciting when associated with your first job, remember that you need to think about all this again every time you move up your career ladder or beyond to become your own (and others') boss. 

2. Getting married. You didn't invite Uncle Sam to your wedding, but he became a big part of your new wedded life as soon as you and your spouse exchanged vows.

The year you say "I do", even if you utter that phrase on Dec. 31, means the IRS considers you married for the full tax year.

The first time that you file taxes as a married couple you'll have to choose a new filing status, either married filing separately or married filing jointly. Joint filing is the most common choice of wedded duos because it generally produces the best tax results.

Yes, the marriage tax penalty is still around, but it's not as severe thanks largely to the broadening of the tax bracket for that filing status. Plus, some tax breaks aren't allowed to a husband and wife who file separate returns.

Even before filling out that first shared Form 1040, if both spouses work each should reassess withholding amounts. The IRS says it's generally better for the higher-earning spouse to claim all the couple's allowances on his or her W-4, with the lower wage earner claiming zero.

Also be sure to take a look at your tax-favored workplace benefits and coordinate to maximize between spouses. For those that require family circumstances in order to adjust them, marriage definitely qualifies.

3. Having children. Congratulations on your new baby. Your favorite Uncle Sam wants to help cover some of your growing family's costs via a variety of child-related tax breaks, including credits that reduce your tax liability dollar-for-dollar and in some cases can provide a tax refund.

If your family grew via an adoption, there's a tax credit (and, as mentioned in the work situation, a possible a tax-free workplace benefit) to cover some of the many costs of that process.

Working parents can use the child and dependent care credit to pay for some of the costs of caring for their kids while they are on the job.

And the tax code also offers several ways to help families save for and pay for your future student's educational costs.

4. Buying (and selling) a home. Your growing family means you need more space. Not only will a bigger abode mean more space, it also could provide some tax breaks. Note, however, that you'll need to itemize to claim most of them. Note, too, itemizing has become a less advantageous, and hence a less-popular, filing option since the Tax Cuts and Jobs Act (TCJA) of 2017 greatly increased the standard deduction amounts.

Still, if you find your home makes filling a Schedule A worthwhile, you can deduct the interest you pay on your primary residence's mortgage up to $750,000 (for home loans taken out after Dec. 14, 2017). Interest on a home equity loan or line of credit of up to $100,000 also is deductible as long as the money is used for purposes directly related to the home.

Property tax you pay on your main house also is deductible, but it could be limited. The TCJA caps state and local tax (SALT) tax deductions, both real estate and state income amounts, at a combined $10,000.

The 2025 tax year, however, might be the last for the individual TCJA provisions. Unless Congress extends them, they are set to expire on Dec. 31, 2025. It’s unclear right now whether Capitol Hill will simply renew them as is, or make some changes, for example, to the $10,000 SALT federal deduction cap.

Some energy-efficient home upgrades, also are still around, and were expanded as part of the Biden Administration’s Inflation Reduction Act. The various improvements to your primary residence, and in some cases a second home, could get you a tax credit of up to $1,200 per year for qualifying changes made through Dec. 31, 2032. Some of these environmentally friendly laws, however, also have come under fire by Republicans, who will be in control of the House, Senate, and White House in 2025-2026, so keep an eye on possible changes here.

One of the best, and longest-standing, tax benefits of homeownership still looks pretty secure. If you’re a single homeowner, when you sell your residential property up to $250,000 of your sales profit ($500,000 for married joint filers) is tax-free as long as you owned the property for two years and lived in it for two of the five years before the sale.

5. Dealing with divorce. As with marriage, taxes play a surprisingly large role when romance fades.

The date of your divorce, just like your wedding day, determines your filing status for the full tax year. If your divorce is final Dec. 31, then you are considered unmarried for the full year.

Spousal support, commonly known as alimony, used to have to take taxes into account. The TCJA changed that. Before the tax reform law took effect, the recipient of alimony had to pay tax on the money and the ex-spouse making the support payments could deduct them as an above-the-line deduction. That's still in effect for marital splits before the law took effect in later 2017.

But for subsequent divorces — I'm talking generally here with this plural, not your personal serial separations! — alimony isn't a tax factor. It's no longer taxable to the ex getting it or deductible by the ex paying it. Basically, now alimony is just like child support, another sticking point in many divorces.

In addition to who pays what for the care of a former couple's kids, divorce also will mean changes in filing status. The parent who gets primary custody should file as a head of household, which provides a larger standard deduction amount. The custodial parent also can claim the child-related tax breaks when filing. The other parent will file as a single taxpayer.

One ex-spouse also typically is granted sole ownership of the family home. This could pose a problem for the newly single owner, especially when he or she sells the property. The profit exclusion amount then is just $250,000 versus the $500,000 that married filing jointly homeowners can exclude. Take that possibility into account before finalizing your split, perhaps opting to sell the house before the divorce and splitting the tax-free profits as part of the final decree.

Similarly, you need to consider the tax treatment of other assets when dividing them. For example, a spouse who gets capital gains assets will owe less tax than on property, such as tax-deferred retirement accounts, that are taxed at ordinary rates.

6. Relishing retirement. Remember back when you got that first job? It's amazing how quickly you'll go from that momentous day to the equally notable one when you retire. Your golden years will be more enjoyable if you take advantage of the many tax breaks afforded by a variety of retirement plans.

A traditional IRA contribution could produce a tax deduction when you file your tax return. Remember, though, that you'll have to pay taxes on this account (at the normal ordinary tax rates) when you start taking out money in retirement. The IRS makes sure you do this by enforcing required minimum distribution, or RMD, rules.

When you start taking out retirement fund money, or proceeds from other assets you set aside for retirement, you also could face an added tax task. You'll owe tax on the distributions, and our tax system wants it when you get it.

You can instruct the payer of some retirement amounts, such as traditional IRA and annuity distributions, to automatically withhold a certain percentage of your payout for tax purposes. But if you sell other assets for a capital gain, or simply get year-end capital gains distributions and dividends throughout the year, withholding is not generally done. That means you'll need to make estimated tax payments to cover what’s due and avoid late and/or underpayment penalties.

Not dealing with taxes in retirement is a big argument for having a Roth IRA. With this account, you put in already-taxed money, so the eventual Roth distributions are tax-free. The biggest drawback to a Roth is that you can't open or contribute to a Roth if you make a lot of money. However, regardless of your income, you can convert a traditional IRA to a Roth.

Workplace retirement plans, usually known as 401(k)s or Roth 401(k)s, offer similar retirement saving options, but with a nice bonus. Many employers match some of your plan contributions, which helps your retirement savings grow more quickly. Remember, though, that the traditional versions of these accounts also are subject to RMDs.

Social Security benefits generally are tax-free as long as you don't have a lot of other income. If you do, as much as 85 percent of your federal retirement amount could be taxed.

And if you do have to file a tax return when you're older, you can claim a larger standard deduction amount on the new Form 1040-SR simply because you're age 65 or older.

Well, there you have it. A quick look at your “Your Life on Taxes.” I hope the 2024 edition was a happy one!

And remember that taxes are part of your life even on more mundane days. So, it pays to pay attention to them periodically, if not on a daily basis.

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