Life events such as marriage, divorce, death of a spouse, birth or adoption of a child, a new job or the loss of a job and retirement, all impact year-end tax planning.
Marriage: Marital status (single, married or divorced) for the entire tax year is determined on December 31st. Because the income tax brackets vary depending upon filing status, a marriage penalty or a marriage benefit may result for any particular couple.
As a general rule, if each partner has income approximately in the same amount as the other, they will pay more filing as a married joint return than as two single individuals. Accelerating or postponing marriage or divorce at year- end might be considered based upon this difference in tax brackets.
Same-Sex Marriage: The Supreme Court held in June 2015 that the Fourteenth Amendment requires a state to license a marriage between two people of the same sex. States must recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-state.
Co-habitation: If there is a couple who owns a principal residence together and they are not married then there is good news now as a result of a Tax Court case in 2015 and an affirmation in the Ninth Circuit Court of Appeals to which the IRS has acquiesced in 2016. Now when multiple unmarried taxpayers co-own a qualifying residence, the debt limits of
$1.1 million for acquisition debt apply to each individual. Therefore, if two people were thinking of getting married and the debt is greater than $1.1 million then they may want to stay single and continue to live together unmarried.
Dependents: A child born at any time during the tax year is considered a child for that entire tax year. Subject to Adjusted Gross Income (AGI) limits, a child born at year-end 2016 entitles the parent to a full $4,050 personal exemption, a full $1,000 child tax credit and up to a $600 child care credit if eligible.
These benefits also have cut-off ages that is tied to the age of the dependent before the close of the tax year: if under age 19 (or incapacitated, or under 24 if a student) the dependency exemption could be lost. Also remember if the child is no longer a full-time student for any part of 5 months they will not qualify as your dependent. If under age 17 you can use the child tax credit. If under age 13 (or incapacitated) you can use the child care credit.
Retirement: Taxpayers may want to take a look at a number of different provisions at year-end in anticipation of retirement, at the point of retirement, or after retirement. Many of these provisions have opportunities and deadlines keyed to the tax year. Three strategies especially stand out for year-end consideration: