Tax Implications of Life Events

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The Motley Fool contributor Roy Lewis has a great article detailing the various life events and what their tax implications are, something that’s difficult to find (at least the differences) when you’re just skimming through the tax code (as I enjoy doing on a lazy Sunday morning). For example (and people with kids should know this), that if you have children then you may qualify for a Child Tax Credit ($1,000 straight credit, not a deduction!)? I only know because Nickel always tells me (he he’s raising four boys, he needs all the help he can get!) but unless TurboTax told me I probably wouldn’t know about it. If you have someone watch your child while you’re working, you might qualify for the Dependent Card Credit, which can be a credit up to 35% of your qualifying expenses. Anyway, the list is broken up into starting a new job, getting married, getting divorced, and leaving a job. Just recently I’ve started a new job and, of course, left an old job, and soon I will be married – so 75% of the article is pretty relevant. I’ve only outlined the marriage one below because I think it identifies a lot of things newlywed couples don’t think about (whereas when you leave or start a new job, finances are usually on your mind) and something that I knew little about personally.

Marriage penalty – Yuck! This refers to the fact that the tax brackets for a married couple is “flatter” than the tax bracket for someone filing with single status (doubled). That means if you were to treat a married couple’s income as one and filed as a Single, you’d be paying less in taxes, hence the term marriage penalty.

The Tax Relief Act of 2001 fixed a few of these penalties, mostly for the lower end of the income spectrum. First, the standard deduction was lower (which won’t affect us since we are paying a mortgage) for joint filers in the same way the tax brackets were flatter, but this penalty was alleviated when the standard deduction for joint filers was made to be double that of singles. With respect to the tax brackets, the 10% and 15% brackets for joint filters were moved to be double that of single filers, but the other joint filer brackets are still less than double their single counterparts (boo!).

Adjusting withholding after marriage – As a result of the marriage penalty and shifting tax brackets, the article warns that couples must review their withholding so they don’t get screwed on April 15th. This is a good point and one I, and most people, probably wouldn’t have thought about. I mean you get married, then you go on the honeymoon, then your new wife forces you to have a joint checking account so she can buy shoes with your money… how is someone supposed to remember to check their withholding status of all things? (If you are a woman, replace wife with husband and shoes with unnecessary and ridiculously expensive electronics that serve only one single purpose)

I recommend everyone read the rest of the article, especially if you’re contemplating a job switch, because it maps out some important things to remember if you do take the plunge.

Source: Yahoo Finance.

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4 Responses to “Tax Implications of Life Events”

  1. Angry Dinosaur says:

    While it is hugely important to recognize the tax increase and plan ahead for April 15th, adjusting your withholding may not be the best way to do so. You will be giving more money earlier to Uncle Sam, who will keep it all year long and never pay a dime in interest. The more effiecient thing to do is to know that the expense is coming, and to save all year in an interest-bearing account to cover the difference.

    This goes for all taxpayers, whether they’re getting married or not. It is better to owe on tax day than it is to get a return, because the return means you missed out on some investment income. Owing, however, means that you essentially had a 0% loan all year from George W!

  2. paul says:

    The 1,000 tax credit for each child is an even better deal than some people know. If the credit exceeds your tax liability, the Federal Government will pay money back to you beyond what you owe. For instance, if you had zero withholding, a tax liability $3,000 and you have four qualifying children, you will receive a $1,000 refund

  3. jim says:

    Angry Dinosaur, if your tax liability is greater than $1000, you will pay a penalty on top of what you owe because otherwise everyone would pay $0 in taxes and just pay it at the end.

  4. Matt says:

    The “marriage penalty” only exists if both spouses are earning similar levels of income, however. I know my taxes are going _way_ down after the wedding.

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