How Life Changes Affect Your Taxes

Ferris Bueller said that "Life moves pretty fast. If you don't stop and look around once in a while, you could miss it." Well, the IRS won’t miss out on your life and whatever changes may be at the forefront. Whenever you make a huge life transition—whether you get married or you retire—your taxes will be affected. Read below to find out what kind of tax changes you should expect.

Tax Questions Commonly Asked

1. What happens if I get married?
   • If you get married by December 31, you are considered married for the whole year.
   • Standard deduction for filing jointly is $11,600 for 2011, filing separately is $5,800.
2. What happens if I buy a house?
   Buying a house is a big step in both your life and your finances.
   • Mortgage interest and real estate taxes paid on a home are tax-deductible.
   • Additionally, you can deduct:
     • Property taxes
     • Private Mortgage Insurance payments
     • Purchase points
     • Home improvements for medical reasons
     • Mortgage interest on a second home
   • If you entered into a binding contract to buy your first home before May 1, 2011 and closed on the home before July 1, 2011, you might qualify for the $8,000 first time home buyer credit. Additionally, when you sell a home that you owned for at least 2 years in the past 5, the gain on the sale up to $250,000 is not taxable.
3. What happens if I have or adopt a baby?
   • For each child you can claim an exemption for $3,650.
   • You may be able to take a tax credit for qualifying expenses up to $13,360 paid to adopt a child. And, if you adopt a "special needs" child, you can claim the full credit even if you spend less than $13,360 on adoption fees.
   • If you pay for child care so that you can work, you may also claim a credit for 20% to 35% on eligible costs.
4. What happens if my child goes to college?
   • If your child is a full time student, you can claim them as a dependent until age 24 unless they file for a personal exemption on their tax return.
   • You are also able to claim the Lifetime Learning Credit of up to $2,000 for qualified tuition and related expenses paid at an eligible educational institution. Another credit, the American Opportunity Tax Credit, allows you to deduct up to $2,500 for tuition paid for the first 4 years of college. However, you can’t claim both credits in the same year for the same child.
   • If you are paying off a student loan, you can deduct up to $2,500 on the interest.
5. What happens if I get divorced?
   • If you become divorced before December 31, you are considered unmarried for the entire year.
   • Whoever the kids live with longer gets to claim the exemptions for them.
   • If you receive alimony you have to pay taxes on it, but child support has no effect on taxes.
6. What happens if I retire?
   • Pensions and annuities are usually taxable when distributed.
   • If half of your Social Security plus other income exceeds $32,000 for filing jointly ($25,000 otherwise), a portion of the benefits could be taxable.
7. What happens if my loved one dies?
   • In 2011, an individual could give up to $13,000 (in either cash or property gifts) during the year to any other individual tax-free without the recipient reporting the gift as income. For any amount over $13,000, the donor must file a gift tax return and any gift tax is the donor’s responsibility. Certain inherited property, such as IRAs and pensions, are taxable when distributed to the beneficiary. Also, if your loved one left an estate more than $5 million you will need to pay estate taxes.
   • The taxpayer's final return must be completed by the administrator of the estate.
   • If a spouse dies, you can file a joint return for the year of death.

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