Smart Tax Strategies For The Big Personal Finance Events In Your Life

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tax strategies for the big personal finance events

As you move through various stages of life, not only do your priorities (and hairline and waistline) change, but so should your personal finance and tax strategies. Uncle Sam gives and takes tax credits and penalties based on your employment, marital, and family status. It’s important to know what changes and when, so you can stretch your dollars further. Here are some tax tips to consider at each of life’s major milestones:

Single and Working

Practice good money management by re-calculating your anticipated tax annually and adjusting your W-4 to match it. Just like Goldilocks, you’ll need to get your withholding “just right”. Under withholding results in a penalty; but over withholding is simply loaning your money to the government with no benefit to you.

Make retirement contributions. Reduce your taxable income through salary deferrals including 401k, 403b and 457 plans. In addition, if you qualify, you can receive the Saver’s Credit for Retirement Savings Contributions. See IRA Publication 590 for eligibility guidelines. Putting money into an Individual Retirement Account (IRA) can further reduce your taxable income.

Mint Tip: Not sure if you qualify for a Roth or Traditional IRA? Find the right IRA for you with’s IRA Advisor.

Familiarize yourself with the standard deduction. Many deductions are only available if you itemize, including charitable contributions, real estate and state taxes. You should take the standard deduction if your itemized deductions are less than the standard deduction.

Married Without Kids (remember when they called you D.I.N.K’s?)

Exploit both the standard deduction and the itemized deduction. If your itemized deductions are similar to the standard deduction, consider bunching deductions and taking the standard deduction every other year. An example of “bunching” is to pay your property taxes both at the beginning of one year and at the end of the same year.

Compare the benefits offered by both of your employers and use the best combination offered. You’ll find that health care, insurance, flexible spending and other benefits vary widely by employer. It’s worth your time to study those HR documents and pick or “cherry pick” the plan that best benefits your personal finances.

Understand tax brackets and the “marriage penalty”. You may pay more taxes by filing as a married couple than you would if you were still filing as two single employees. This is what is commonly referred to as the marriage penalty, which exists for couples in tax brackets above 15%. As a general rule, if you and your spouse make similar salaries above that level, you may be penalized for filing jointly. If your salaries are quite different, you’re more likely to benefit from joint filing. Find out what’s best for your specific situation before choosing your filing status.

Young Family with Children

That sleep deficit may be partially offset with these tax credits:

Obtain social security numbers for children in order to claim them as dependents on your tax return.

Claim the child tax credit on your taxes. As long as your baby was born on or before December 31, you are eligible for the full year’s tax credit of $1,000 per child.

Enroll in your employer’s dependent care flexible spending plan. If you plan on using day care or a babysitter you can set aside $5,000 per year to pay for childcare with pretax income. That’s going to help make childcare more affordable. You can change the amount mid-year if your childcare provider changes, or if the rates change.

OR Utilize the Child and Dependent Care Credit. If your employer doesn’t offer a dependent care flexible spending account, you may be able to use this credit for up to 35% of your expenses, depending on your income. This credit applies up to $3,000 of the expenses paid annually for one child, or $6,000 for two or more children.

Be aware of the Kiddie tax. Children owe no tax on their first $850 of earnings — which creates a great opportunity to maximize income shifting. Earnings between $851 – $1,700 are taxed at the child’s rate and above that at the parent’s tax rate.

Stay home and continue to save for retirement. If one spouse does not work or has limited income you can still fund a spousal IRA — if you file a joint return. The amount is limited by your income and your age. See IRA Publication 590 for guidelines.

Family Focusing on College and Retirement Savings

Past the sleepless years? Congratulations! When your money management concerns shift to getting your kids to leave the nest, and to feathering your retirement nest:

Use college credits. Each year you can use either the Hope Credit or the Lifetime Learning Credit for each student.

  • The Hope Credit is worth up to $1,650 per student per year for the first two years of post-secondary education.
  • The Lifetime Learning Credit is for 20% of the first $10,000 of post-secondary tuition and fees. The maximum is $2,000 per tax return. See IRA Publication 970 for eligibility.

Take advantage of “catch-up” contributions. Those 50 and over can contribute an additional $5,000 annually to a 401k, and an additional $1,000 annually to an IRA.

Retired Individuals

Compare your income to the base amount. Social security benefits are not taxable if your modified adjusted gross income is less than defined base amounts. Base amounts are $32,000 for married filing jointly and $25,000 for singles. Make sure you understand your investment options in order to avoid having your social security benefits taxed if your AGI is near the base amount. This can be accomplished by shifting investments from taxable accounts to tax deferred accounts (like an IRA). In addition, beware of investments that provide large dividends and interest, both which will increase your AGI.

Mint Personal Finance Tip for 2007: If the only income you receive is social security, those benefits are not taxable and you typically won’t need to file a tax return. However, you will need to file a 2007 tax return to receive this year’s Economic Stimulus Payment.

Know your Gifting opportunities and limits. Each year you can gift $12,000 ($24,000 for married) per person without having to pay taxes. Any amount above this must be reported and can be taxable. Some gift tax exclusions: some tuition and medical expenses and gifts to your spouse, political organizations and charities.

Required Minimum IRA Distributions begin at age 70 1/2. You could be subject to an excise tax if you do not begin the distributions by April 1st the year after you turn 70 1/2.

As you can see, each stage of your life offers different tax related considerations. It’s worth researching your specific personal finance situation, possibly with the help of a tax professional, as the dollars involved can be significant. For additional details, income and phase out limitations, and all eligibility guidelines, be sure to check out the IRS website.

Mint asks: Do you see yourself in one of these lifestages? Any added money management tips for people in your situation? Is there an important lifestage (from a tax point of view) that we missed?

Further Reading:

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