This past year was full of life changes. I got married, bought a home, and had my first child—all in twelve months. In all of that excitement, I’m worried I might miss something on my 2016 return. What do I need to keep front of mind before I file?
Congratulations on all the exciting news! You are correct. Major life changes can also complicate your taxes. Each circumstance yields new requirements and options to consider. We will discuss the tax consequences for each of your life changes.
Whether you tied the knot – or cut it—it is important to choose the filing status that best applies to your situation. Your marital status on Dec. 31 determines your tax filing options for the entire year regardless of when you married during 2016. You can either file jointly with your new spouse, or use married filing separate status. You should project your tax bill using both methods so you can determine which alternative results in the least amount of combined federal and state tax, since you can file either way.
For many couples, getting married results in a lower tax bill compared to the “single” filing status. This often occurs if one spouse earns significantly more than the other. Couples that earn similar amounts may wind up paying more combined federal and state tax. This is especially true for higher income earners.
When you have a child, your little bundle of joy may bring extra tax benefits. Claiming your son or daughter as a dependent will shelter $4,050 of your income from tax in 2016, saving you over $1,000 if you’re in the 25 percent bracket. You get the full exemption no matter when during the year the child was born or adopted (unless your income is too high).
A new baby may also deliver tax credits which reduce your tax bill dollar for dollar. The Child Tax Credit can be worth up to $1,000 depending on your income letter.
The Child Care Credit may be available if you incur child care expenses for a child under the age of 13 so that you can work or go to school. The amount of your credit depends on your income and how much you pay for care. The cost of summer day camp also qualifies so be sure to take advantage of this credit if you can because it can save you as much as $2100 for two or more children.
The purchase of a home also brings tax considerations. The largest tax deductions for a first-time home buyer are the mortgage interest and property tax deductions. Your tax return may take more time to complete than in past years since you must itemize your deductions in order to take advantage of these tax benefits. However, it is time well spent because these write offs can result in significant tax savings. If you paid points to obtain your home loan they are also deductible.
If you made energy efficient home improvements last year you may be entitled to a tax credit. The amount of the credit depends on the nature of the improvement, however the maximum amount of the credit is $500 for all of your home improvements
If you’re unsure of what your life changes mean for your tax return, be sure to check in with a CPA or tax professional. We hope 2017 brings you just as much joy as this exciting past year has!
Tom Cooney and Crystal Faulkner are partners with MCM CPAs & Advisors, a CPA and advisory firm offering expert guidance and beyond the bottom line thinking for today’s public and private businesses large and small, not-for-profits, governmental entities and individuals. For additional information, call 513-768-6796 or visit us online at www.mcmcpa.com.
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