Life Events

November 7th, 2016

Life events such as marriage, 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.

Same-sex marriage – The Supreme Court held in June 2016 that the Fourteenth Amendment requires a state to license a marriage between two people of the same sex.  Further, states must recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-state.

Dependents – A child born at any time during the tax year is considered a child for that entire year.  Subject to AGI limits, a child born at year-end 2016 entitles the parent to a full $4,050 personal exemption, a full $1,000 child credit, and up to a $3,000 child care credit if eligible.  These benefits also have cutoff ages that are keyed to the age a dependent turns before the close of the tax year: under 19 (or under 24 if a student) for the dependency exemption and the “kiddie tax rules, under age 17 for the child credit, and under age 13 for 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:

Minimum distribution requirements – Most retirement arrangements (other than ROTH IRAs) require that participants begin to take annual payments of benefits in the year they turn age 70 1/2.  While distributions generally must be made at the end of the calendar year, distributions for the first year can be delayed until April 1 of the succeeding year.

Roth conversions– A traditional IRA may be converted to a ROTH IRA.  As with rollovers to traditional IRAs, the 10-percent additional tax on early distributions does not apply; however, unlike rollovers to traditional IRAs the amount converted is taxable in the year of conversion.

Roth reconversions – Once a ROTH IRA has been recharacterized back to a (new) traditional IRA, the (new) traditional IRA can be (re)converted to a Roth IRA, provided the taxpayer meets the eligibility requirements in the reconversion year.  This reconversion option is most often used to allow a “do-over” when assets that are transferred lose value before year-end.

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