Managing Your Taxes After a Life Event
Life changes ultimately may have tax consequences, from birth to death. During your lifetime, you may go on to post-secondary education, get married, get divorced, have children, send children to college, buy or sell a home, start a business, contribute to a retirement plan, draw money out of a retirement plan, or change jobs. Here is a list of some life-changing events and their tax implications:
Organized by type of event, this IRS page provides resources that explain the tax impact of each.
- A child born on December 31 is assumed for tax purposes to have lived with you the entire year.
- For each qualifying child you can claim an exemption. See IRS Pub 501 for more information.
- You may be eligible for a child tax credit for each qualifying child under the age of 17. See IRS Pub 972 for more information.
- If both spouses work, are looking for work, or are in school, you may be eligible for the nonrefundable child and dependent care credit for up to two children under age 13 or for a disabled child of any age. See IRS Pub 503 for more information.
- You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. See IRS Form 8839 for more information.
- Moving Out Worksheet (pdf)
- Dependent Support Worksheet (pdf)
Death of a Taxpayer
When a taxpayer dies, there are certain returns that still need to be filed, a responsibility that falls onto the personal representative.
- If you are divorced on December 31, for tax purposes you are considered to be unmarried for the entire year.
- If divorced, your filing status is single unless you qualify to file as head of household.
- A noncustodial parent can claim the exemption for a dependent child and the custodial parent may still be eligible to file as head of household. When divorced, be sure to change your Form W-4 to reflect your new filing status.
- You may be able to claim a credit of up to $2,500 for qualified tuition and related expenses for each eligible student in the first 4 years of postsecondary education at a qualified institution. This is called the American Opportunity Credit. See IRS Form 8863 for more information.
- You may be able to claim a credit of up to $2,000 for qualified tuition and related expenses paid for a qualified individual(s) at a qualified institution for postsecondary education. This is called the Lifetime Learning credit.
- For child(ren) under age 18 you may be eligible to contribute up to $2,000 a year to a Coverdell education savings account ( ESA). The contribution is not deductible, but the money does grow tax-free.
- Interest on certain U.S. Savings Bonds cashed to finance higher education is tax-free.
- You may be able to deduct up to $2,500 of student loan interest as an adjustment to income.
- You may be able to take an adjustment to income of up to $4,000 for qualified tuition and fees.
- See IRS Pub 970 for more information on education tax benefits.
- Points paid when you purchase a home are generally deductible in that year. Points from a refinance are deductible over the life of the loan.
- Mortgage interest and real estate taxes paid on your home are deductible. They are generally reported on Form 1098. See IRS Pub 936 for more information.
- You may deduct real estate taxes in the year paid. They are generally reported on Form 1098, Mortgage Interest Statement , the annual statement from the financial institution holding your mortgage, or on your county real estate tax assessment statement. You should also deduct any prorated taxes collected from you at closing. These amounts are not always included on Form 1098, but may be itemized on your real estate closing statement.
- When you sell your home, and you have owned it for the last 5 years and lived in it for 2 of those years, up to $250,000 ($500,000 for married filing jointly) of the gain may be excluded from taxes. See IRS Pub 523 for more information.
- If your home is damaged from a sudden, unexpected event such as a fire, a storm, vandalism, or theft, the loss that is not covered by insurance may be deductible subject to a $100 reduction and a 10% of adjusted gross income limitation. A deductible casualty or theft loss reduces the cost basis of your home by the amount claimed as a deduction. The deductible loss is calculated using Form 4684, Casualties and Thefts, and carried to Schedule A as an itemized deduction.
Inheritance and Gifts
- Inherited property receives a stepped-up basis to the fair market value (FMV) of the property on the date of the individual’s death.
- Property received as a gift retains the basis of the donor.
- An individual can give up to $13,000 (money or property) a year to any other individual tax-free and the person receiving the money or property does not have to report it as income. You must file a gift tax return for any amount over $13,000.
- See IRS Pub 559 and Form 709 for more information
- If expenses are incurred which are not reimbursed by your employer, you may be able to claim them as Itemized Deductions Job Expenses. See IRS Pub 529 for more information.
- If you move to take a new job, you may be eligible to claim moving expenses. See IRS Pub 521 for more information.
- If you change jobs, and had a pension plan (i.e., 401(k) plan) at your old job, you may be eligible to roll over the value of that plan directly into your new employer’s retirement plan or into a traditional IRA. See IRS Pub 575 for more information.
- If you are married on December 31st, you are considered married for the whole year.
- When filing, the name and social security number (SSN) of each person must match that on file with the Social Security Administration (SSA).
- A spouse can never be claimed as a dependent, even if he or she had no income.
- Each spouse should review and probably change their Form W-4 to reflect the change in filing status. Use the IRS Withholding Calculator.
- Pensions and annuities are generally taxable.
- You must start withdrawing from a traditional IRA by April 1 of the year following the year you reach age 70 1/2.
- If you are age 65 or over, and are below certain income limits, you may be eligible for the credit for the elderly or the disabled.
- When receiving a pension, be sure to have taxes withheld, or make quarterly payments using Form 1040-ES, Estimated Tax For Individuals, so that you do not owe too much tax at the end of the year, and become subject to the penalty for underpayment of estimated tax.
- See IRS.gov for Retirement Plan Forms and Publications