Tax Tips for Life's Big Changes
By Laura Saunders | The Wall Street Journal
Sometimes life's biggest changes can save you a bundle in taxes—if you know how to take advantage of them.
What was new in your life last year? Did you get married or divorced, or adopt a child? Did your parents move in—or your adult child? Did you lose a house to a storm?
These and other major events often have tax consequences people are unaware of—precisely because they are unusual, unlike, say, deducting donations. And with big tax increases taking effect this year, it is all the more important for taxpayers to seize any break they can.
Still, many overlook big potential savings.
"People come to us ready to discuss energy credits, but we have to ask if they're caring for a dependent parent," says Mark Steber, chief tax officer at Jackson Hewitt Tax Service. "The IRS seldom has a safety net for missed deductions."
For example, if you paid tuition for a special-needs child in 2012, thousands of dollars could be deductible as a medical expense. If you provided over half an adult child's or parent's support, you might qualify for an extra $3,800 personal exemption.
Such big life changes happen with surprising regularity. Every year about 40% of taxpayers have a major life event such as marriage, job loss or retirement, according to data collected by Intuit, which sells the tax-prep software TurboTax.
Awareness can lead to smarter tax planning as well. Douglas Stives, a CPA who directs the M.B.A. program at Monmouth University in New Jersey, says he had a client whose mother entered a nursing home.
She wasn't wealthy, but she had enough money to pay the annual cost of about $100,000 for several years.
The son was her only heir and had power of attorney.
The mother's nursing-home bill was fully deductible as a medical expense, but it exceeded her income. After consulting a lawyer, her son—who intended to pay his mother's costs if she ran out of money—transferred her assets to himself. He filed a gift-tax return on the transfer and paid her bill.
As a result, the son was able to take a medical deduction of more than $90,000 for his mother's nursing-home costs, and deduct his own medical expenses not covered by insurance. (Without his mother's expenses, they wouldn't have been large enough to qualify.) In addition, the client used the deduction to shelter income generated by converting part of his individual retirement account to a more tax-favored Roth IRA.
The point, Mr. Stives says, is that when deductions are greater than income, "it's important to look for tax opportunities."
To be sure, not all life changes bring tax savings. Newlyweds can face marriage-tax penalties. Unemployment benefits are taxable, even if there is no withholding.
Here are some often-overlooked tax effects of major life changes. Perhaps they will lower your tax bill for 2012 or 2013.
To read the entire article from
Laura Saunders | The Wall Street Journal:
http://finance.yahoo.com/news/tax-tips-lifes-big-changes-023200884.html
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