Jamie Allman, BridgeTower Media Newswires
The joke has always been the two guarantees in life are death and taxes. It is about time we reinvent this old saying to consider the many happy life events that can offer tax benefits to us. To put a more positive spin on it, I think the phrase should be milestones and taxes. As we approach new milestones in life, here are different tax strategies to consider:
Career
Withholding, saving and investing should all be priorities when starting a career. Ideally, you do not want to overpay or underpay the government come tax time. Therefore, selecting your federal and state allowances for payroll withholdings should be a thoughtful process. The fewer allowances you claim, the more withholdings come out of your paycheck and vice versa. You can and should adjust your allowances throughout the year, as your tax situation changes. As opposed to making quarterly estimated tax payments, the nice thing about withholdings is they are considered paid equally throughout the year regardless of when they are withheld.
Besides withholdings, there are investment strategies you should consider early in your career, looking out for future you and your loved ones. For example, with health savings accounts, you can set money aside pretax that grows tax free for qualified medical expenses you may have now or well into retirement. Another example is 401(k) and employer matching. Without getting into the details of different plans, employees should always take advantage of an employer’s 401(k) match. It is free money!
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Marriage
Couples that marry by the end of the year are considered married for the full year and must either file as married filing jointly or separately. There are many advantages to filing jointly. For starters, unlike married filing separately individuals, married filing jointly couples are eligible for family-related tax credits and deductions, such as the Earned Income Tax Credit, Adoption Credit and Student Loan Interest Deduction.
Married filing jointly couples are also able to claim two personal exemptions and twice the standard deduction amount of those filing single or married filing separately. Furthermore, there are usually higher thresholds for joint filers. An example of this is with spouses with much different earnings. The lower earnings can pull the higher earnings down into a lower tax bracket. Another example is higher phaseout ranges for IRA benefits.
Along those same lines, a tax strategy worth mentioning is spousal IRA contributions. Generally, non-working individuals are not allowed to contribute to IRAs. The exception to this rule is an employed spouse may make an IRA contribution on behalf of a non-working spouse.
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Homeownership
Whether it is buying, selling or moving a home, there are tax benefits for each phase. As a homeowner, you can deduct mortgage interest and interest paid on home improvement loans. Additionally, homeowners can deduct their real estate taxes, but this could be eliminated under President Trump’s tax reform.
Homeowners who use a portion of their home regularly and exclusively for their principal place of business may also take a home office deduction. To calculate the deduction, there is either a simplified or regular method. Taxpayers who relocate homes due to a change in job or business location, may deduct certain unreimbursed moving expenses if they meet distance and time tests.
Lastly, married filing jointly taxpayers may exclude up to $500,000 of the gain from the sale of their personal residence. The stipulations for this are the taxpayers must have lived in the house for at least two of the five years preceding the sale, and they can only claim the exclusion once every two years.
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Children
From childbirth to college, there are many tax breaks that go along with raising children. To claim a dependent exemption for your child, under the qualifying child test your child must be either younger than 19 years old or be a student younger than 24 years old as of the end of the year. Examples of tax credits that are geared towards families with children are the Federal Child and Dependent Care Credit, Federal Child Tax Credit, New York Empire State Child Credit, and Federal Earned Income Credit.
If possible, it is a great tax strategy to start 529 college savings plans early for your children. The overall benefits of these accounts are earnings grow tax-deferred and qualified withdrawals are tax-free. Because 529 plans are usually sponsored by states, New Yorkers specifically can further benefit by being able to deduct up to $10,000 of contributions per year for married filing jointly. During college years, there are credits and deductions available on both the federal and state levels. Most tax software is sophisticated enough to help taxpayers optimize between them.
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Retirement
Aside from knowing your full retirement age for Social Security benefits, ages 59½ and 70½ are important. At 59½, you can withdraw from your retirement account without paying the 10% federal early withdrawal penalty. At 70½, required minimum distributions (RMD) must start. A tax strategy for individuals who must meet this requirement is qualified charitable distributions. Under this strategy, they may transfer up to $100,000 of their retirement funds per year to a qualifying charity. This helps them twofold by being able to exclude the contributed funds from income and meeting their RMD.
Looking more specifically at New York State, there are three retirement income exclusions to be aware of. First, Social Security benefits included in federal adjusted gross income may be excluded from New York taxable income. Secondly, pensions from the United States, New York, and local governments may be excluded from New York taxable income. Lastly, taxpayers who receive pensions or annuities from plans other than those just mentioned may exclude up to $20,000 for each spouse from New York taxable income.
Hopefully my brief take on milestones and taxes was enough to show you it is not all doom and gloom. There are many life events to look forward to and opportunities in the tax code to lessen the financial burden along the way.
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Jamie Allman, CPA, is a manager in Mengel, Metzger Barr’s Department. She may be reached at 585-423-1860 or via email at jallman@mmb-co.com.
