Major Life Events May Mean Major Tax Changes

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Major life changes can be stressful, not least because they often affect your taxes. The following are just some of the many life events that you’ll encounter, along with some tips on how to cut your tax bill or save money.

Getting married. Your marital status affects the tax bracket you’re in and doubles your standard deduction to $24,800. If you are married and either you or your spouse is 65 or older, your standard deduction increases by $1,350. If both you and your spouse are 65 or older, your standard deduction increases by $2,700.

Get a bigger benefit: A spouse who doesn’t work can contribute to a spousal IRA if they file taxes jointly with a spouse who does work. If each spouse has an IRA, both can contribute up to $6,000 in 2021 ($7,000 if age 50 or older).

Getting divorced. If you have a divorce or separation agreement executed after Dec. 31, 2018, the payer spouse gets stuck with the tax bill, as alimony is no longer deductible from the income of the spouse paying it. On the other side, the spouse receiving the alimony payments doesn’t report the payments as income. Child support follows the same equation – it’s not deductible by the payer spouse, and doesn’t need to be reported as income by the spouse receiving the payments.

Birth. With a new birth comes a new dependent on your return. You may now qualify for credits and deductions that can have an immediate benefit on your tax situation. You also have the option of withdrawing $5,000 per parent (or $10,000 total as a couple) without penalty from qualified retirement accounts to help with costs associated with your new bouncing baby. You’ll still owe income taxes on this distribution, but can avoid an early withdrawal penalty.

Get a bigger benefit: Parents who work can take a tax credit for expenses related to dependent care for a child under age 13, so a newborn child would qualify. The maximum credit for one child is $1,050; the maximum for two or more children is $2,100.

Please call if you have tax questions about these and other major life events.

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