Apart from birth and death, taxes are possibly the next inevitable occurrences in every American’s life. They used to be something to joke about but with the recession that continues onward and the taxes, high energy costs, including gas prices, there is very little laughter occurring in contemporary America. And often and moreover, the major events of one’s life would also have tax ramifications to cater to.
Considering the fact that taxation laws are being reformed and restructured with time to make it more complicated on American citizenry, it is immensely essential to come to terms with the prevailing provisions available to minimize the tax implications to the maximum possible extent.
As most of the major events in life would have their own repercussions, it would be necessary to consider some salient tax planning tips that can help you save beforehand. Some of the essential tax planning tips relevant to major events in life is discussed here.
Taxation Issues On Marriage Or Divorce
Be it a marriage or a divorce, this will change your life and identity. Therefore, it must ideally prompt you to review your tax situation right away. After all, in both cases, your tax filing status is liable to change! Especially, if the event is slated to occur around year end, it would be essential to review the tax ramifications first.
You may have to make adjustments in your allowances for the purpose of withholding income tax. In case of a marital alliance, you may wish to correlate your fringe benefits along with the benefits your spouse is entitled to. If it’s a divorce, you may have to look out for other sources that can provide you with the benefits that were being obtained from the employer of your spouse before the marriage, if any.
Furthermore, the tax ramifications pertaining to divorce agreements would also have to be checked into. Determine the claimant for minors who act as dependents on your tax returns. Determine the payments classified in lieu of alimony or child support since their tax ramifications would be completely different. You would also have to review how the property division would stand to affect your tax liabilities.
Birth Of New Member & Tax Ramifications
Once your child is born you can avail of the child tax credit amount of $1,000 each year till your child becomes 17 years of age. However, if you are in a higher income group, the credits could be phased in. In case you pay for any child credits, you could be eligible for child care credit. You may also check if your employer provides a child care reimbursement account. In such cases, you can pay for your child care expenses from your pretax earnings.
You may also choose to save for college for your child. The plans under section 529 and Coverdell education savings accounts could provide you with tax advantages too! Once your child, or young adult, begins college, make sure you are aware of other ways they can reduce costs.
Annual gifts could also be a prudent way of saving on taxes. For instance, you can gift $12,000 in a year and the amount escalates annually in order to keep pace with inflation in increments of $1,000 dollars. This will bring down your taxable estate and you can end up avoiding payment of taxes on any earnings on these assets. However, you need to be aware of the “kiddie tax”. This refers to the way in which the investment income of your child would be taxed. Although it is applicable to children below the age of 14 in past years, it will now apply to children who are under the age of 19 and to students who are below the age of 24.
What About Retirement Tax Planning?
One of the most essential aspects of life that requires a foolproof tax planning strategy is retirement. You need to adopt and enlist prudent tax practicing methods pertaining to saving for your retirement. Although there might be many demands on your income, retirement planning and investing should always be something you are fueling.
To start with, consider participating in your 401k plan, if your employee offers it and if they have one, as soon as you meet eligibility norms. Contributions made here could reduce your taxable income for the current year. However, you may still be required to pay Medicare and social security taxes despite these programs costing America more and having run their course. If your employer matches your 401k contributions, you need to make sure you are taking full advantage of this.
Even if you may be contributing to a 401k, make sure you also take a look at an IRA. The traditional advantage of an IRA is that it reduces your taxable income for the current year. Although Roth IRAs may not reduce your taxable income for the current year, the qualified distributions can be income tax free and a Roth IRA is tax free when you pull money out of it after a certain age. In case you aren’t eligible for a Roth IRA or a traditional IRA, you can consider resorting to a nondeductible IRA. Starting in 2010, all American tax payers are allowed to convert their traditional IRA into a Roth IRA. There are not any restrictions levied with respect to income levels.
It is essential to check your available options before retirement strikes (or you will not have a retirement or certainly anything to smile about). The choices made regarding the distributions from your personal pension plan as well as your IRA, if you have one or the other or both, will definitely have a significant effect on your tax situation post retirement. So, you need to make sure that all options have been duly reviewed before deciding on when you should withdrawal funds and by what amount.
Time Never Stops
Research has revealed that most American middle class taxpayers do not find it necessary to consult a tax advisor simply because they feel they aren’t wealthy enough to need tax planning advice. This is certainly a gross mistake! At all times, the bottom line remains that tax planning can attribute to significant financial savings. Therefore, determine the best way to manage your taxes so you can benefit in the long term for sure and possibly in the short run as well.