Keeping Pace at the Speed of Life - Part 1
by Bob Williams
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Right about this time every year, you’re pretty used to reading from us, “Here’s what’s new for this tax season…” and we go on about the changes to the income tax code for the year.
But what about you? Yes, YOU. What’s new or changed in your life since this time last year that could impact what or how you file your next income tax return?
Did you get married? Divorced? Did you have a baby? Did you adopt? Did you buy a new car or just get rid of the old one? Did you get a new job? Did you get a raise at the same job? Did you buy a new house, sell an old one or decide to rent instead? Did your kids move out or did your parents move in?
But we think you get the picture. A lot can happen over the course of just 12 months that can alter your tax picture. So let’s take a look at some of the ways your life can change – and change your tax picture in the process. Remember, though, we’re only hitting the high spots, so you’ll need to do more research to make sure your exact situation is covered.
Table for One
While marriage is a pretty simple prospect to deal with in the tax world (just fill in the Spouse area on the Personal Information screen), separation or divorce can be a bit stickier. If you’re divorced by official decree – that means your divorce is finalized – on the last day of the year, that means you are considered unmarried (single) for the whole year.
If you and your spouse are separated but not divorced – or the two of you don’t agree to file a joint return - Married Filing Separately status may be the way to go on your return.
You may be able to file as Head of Household if you are considered unmarried because you live apart from your spouse and you meet certain tests (we’ll get to those in a minute). But HoH could apply to you even if you’re not divorced or even legally separated. And if you qualify as Head of Household, your tax may be lower than if you had filed Married Filing Separately. Not only that, but you may also be able to claim the Earned Income Credit and other credits; and your standard deduction would be higher.
Now, about those tests for qualifying as Head of Household: First, you have to be unmarried or “considered unmarried” on the last day of the year. Second, you must pay more than half the cost of keeping up a home for the year. And third, you must have a qualifying person (such as your child, a parent or other dependent) who lived with you for more than half the year. If that person is your dependent parent, though, he or she doesn’t have to live with you to satisfy the test.
You can see how just the simple act of divorce (did he say simple??) can get pretty complex in a hurry when the tax code is involved. For all the requirements and solid advice on when to claim what, look up the IRS Publication 17, Your Federal Income Tax, and go to the Filing Status section in Part One.
A Brand New Bundle of Deductions
Hopefully your new Bundle of Joy will have “Deductions” printed all over his little blankie. Normally, the IRS’ idea of a “qualifying child” has to live with you for more than half the year to rate dependent status. But if the dependent is a newborn – born during that tax year – the little tyke is a dependent, as long as he or she spent more than half their time in your home.
Adoption is pretty straightforward as far as dependent status goes. An adopted child is always treated as your own child. So as long as the adopted child meets the other tests (under age 19, in your home for more than half the year, and receiving more than half their support from you, the taxpayer) applied to a biological child, there’s no difference in the qualification process.
All this opens the door to the Earned Income Credit (EIC), and in the case of adoption, the Qualified Adoption Expense adjustment. Here too, the IRS Publication 17, Your Federal Income Tax, is one of your best reference points.
Next time: More Moving at the Speed of Life
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