Life Events Create the Need for Planning

The need for a tax planning session is often triggered by a big change in your situation. These changes, often called life events, can make a difference in your upcoming tax bill and, ideally, should have a plan before the event occurs. Here's a look at several of these life events and how they could change your tax bill.

• Marriage. Getting married comes with plenty of tax decisions. This is especially true if a home or two is involved or there is a change in the number of your dependents. But it starts with deciding the basics, like filing joint or separate tax return, understanding the changes a joint filing will make, and seeing if it changes the way you report your deductions. Plus if you are an older couple walking down the aisle, you will need to account for the possible taxation of Social Security benefits.
  
  Tax Tip: If one spouse doesn’t work, they can still contribute to a spousal IRA, as long as you file jointly. For 2025, each spouse can contribute up to $7,000 ($8,000 if age 50 or older). And a bonus tip: Remember you are deemed married for the full year even if you get married on the last day of the year. Use this knowledge to your tax advantage!
  

• Divorce. If you have a divorce or separation agreement executed after Dec. 31, 2018, the spouse making alimony payments pays the tax bill. Child support follows the same equation, as the child support payments do not need to be reported as income by the receiving spouse and are not deductible by the person paying it. Plus each asset distributed may have differing tax treatment. So before the divorce becomes final, sit down to understand the after-tax value of what you are agreeing to do.
  
  Tax Tip: If both parents agree, it’s often best for the higher-earning parent to claim the children on their tax return. Doing so allows them to file as head of household, which offers a higher standard deduction than filing single and can unlock valuable tax credits. Be sure to factor this into your divorce agreement.

• Birth. A new baby means a new dependent—and potential tax savings. You may qualify for new credits and deductions right away.
  
  Tax Tip: Working parents can claim a tax credit for child care expenses for kids under age 13, so a newborn qualifies. Some employers also offer dependent care reimbursement benefits. Remember that dependent related benefits apply here too, whether it is a new birth or an adoption.
  

• Buying or selling investments. Investments are subject to differing tax rates, often related to how long you own the underlying asset. Plus using appreciated long-term investments as part of a charitable contribution strategy is one of the best tax savings ideas still available to everyone. So managing the timing and way you sell property can really change its tax nature. In addition, if you have a choice, consider placing income-generating investments, such as bonds or dividend stocks, in tax-deferred accounts such as IRAs or 401(k)s. Use taxable accounts for investments you intend to hold for more than one year, as these will qualify for favorable capital gains tax treatment.
  
  Tax Tip: Consider selling investments with losses to offset assets you sell at a gain.

• Selling your home. If you’ve owned and lived in your home for at least two of the last five years, you may exclude up to $250,000 of profit from taxes ($500,000 if married filing jointly).
  
  Tax Tip: Track and document all home improvements, as this increases your home's cost basis and reduces any future tax bill when you sell.

Major life events should prompt an important question: Will this affect my tax bill? Often, the answer is yes!