Tax Planning Insights: March 2021

Tax Planning Insights: March 2021

In this issue:

  • Major Life Events May Mean Major Tax Changes

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.

    Get a bigger benefit: If the parents can agree, the spouse with the higher income can claim all or most of any kids in the family. Being able to claim one or more kids on your tax return means being able to file your tax return as Head of Household, which has a larger standard deduction ($18,800 in 2021) than a single taxpayer ($12,550 in 2021). The parent may also qualify for the $2,000 child tax credit for each kid.
  • 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.
  • Moving. Be careful if you make a move this year! Moving expenses used to be tax deductible, but that deduction has been suspended through 2026. If you incur any moving expenses, you can’t use those expenses to lower your tax bill. While the federal government won’t let you deduct moving expenses, you may still be able to claim a deduction on certain state tax returns.

    Get a bigger benefit: One option is to ask your employer to reimburse you for moving expenses. While this is considered taxable income, some employers will gross up the amount of money they give you to cover the tax hit you’ll take. Another option is to do as much of the move yourself as you’re able to and try to move, if possible, during a low-demand time of the year.