Did you get married or divorced this year? Have a baby? These events not only have a huge impact on your personal life, but they can also substantially impact your financial world. When your marital status changes or you have a baby, your filing status, personal exemptions and tax bracket will all be affected.
The big life changes we all experience can have a significant impact on your tax return. If you got married, experienced a divorce, had kids, or if your kids reached a certain age during the year, you may want to consider sparking a conversation with your tax professional regarding the significant effects they could have on your tax strategy.
Did you get married during the year?
Your filing status is determined on December 31st of each year. As a result, if you get married on the last day of December, you will be considered married for the entire tax year. Once married, your filing status can be changed to either married filing jointly or married filing separately, with married filing jointly being the most commonly elected and generally the most beneficial status.
If you and your spouse live in the state of California and have a combined income of over $1,000,000, it may be beneficial to talk with your tax professional about the possibility of electing married filing separately this year. The passage of Proposition 63 (now known as the Mental Health Services Act or MHSA) in November 2004 imposes a 1% tax on personal income in excess of $1,000,000. Filing separately may help you save on this tax or even avoid it all together.
Are you the head of your household?
If you experienced a divorce or became a single parent this year, you may have the opportunity to file as Head of Household (HOH), which offers important tax advantages when compared to filing single. First, you will enjoy a more favorable tax rate. Second, you will be eligible for a larger standard deduction ($9,300 vs. $6,300 for single filers). Find out if you qualify to file HOH here: https://www.irs.gov/publications/p17/ch02.html
Do you have one or more qualifying dependents?
The benefit to claiming a qualifying dependent is a $4,050 reduction in taxable income for the tax year 2016. Additional benefits could apply to a taxpayer claiming a qualifying dependent, such as the child tax credit or the child care credit. If a person qualifies, you may claim them as a qualifying child or relative (but not both). There are specific circumstances which may qualify someone as a qualifying dependent, which can be found here: https://www.irs.gov/publications/p17/ch03.html .
Filing season is coming up. What do you need to do?
Here at Lindsay & Brownell, we like the fifth season (tax season!) to flow smoothly. So how can you help us while avoiding penalties, interest and other potential issues for yourself? It’s simple! Taxes must be paid and returns filed on time. We do most of the work for you, but we need your information and assistance in order to do so.
Your 2016 Tax Organizers will be delivered by the end of January 2017. While many of your tax documents may not be available until later in the year, there are items that you can begin to accumulate and prepare now to make tax season easier. Some examples of items that you can start compiling are your business expenses, charitable contributions, property taxes, DMV fees, rental income and expenses, medical expenses, etc. Additionally, employers and contractors will send Forms 1099 and W-2s to you by the end of January. Such items can aid in the early preparation of your return while we wait for your remaining tax documents. If you are invested in partnerships or other pass-through entities, don’t wait for your Schedule K-1 to arrive, we can complete the majority of your return early and add those missing pieces when they become available.
When you experience a significant life change, whether it is a change in marital status or a new bundle of joy, there can be significant tax consequences. Be prepared this filing season – if you have questions about this topic, or would like help with any other tax matter, please contact your L&B professional at (858) 558-9200.