First comes love, then comes marriage, then comes…taxes?
Between the dismal economy and just business as usual, the year 2009 was filled with major life changes for many people. Now, as we approach Valentine’s Day, many more can expect another major life change in the near future–marriage. An estimated 2.2 million Americans get married each year, and approximately 10% of those marriage proposals happen on Valentine’s Day.
Valentine’s Day also happens to fall during tax season–and it’s important to know that most of life’s big milestones, such as having a baby or buying a home, come with lovely (forgive the pun!) implications. Here are some timely tax tips to plan for these life-altering events which may have occurred in 2009:
You Got Hitched in 2009
Americans are waiting longer to get married. The median age for a man and woman’s first marriage was 27.6 and 25.9 years, respectively, in 2008. (In 1960, men typically got hitched at age 22.8 while women were 20.3.) There are plenty of social implications for delaying marriage, but waiting longer to tie the knot means that you may be more established in your financial life, too. And that can make filing your taxes more complicated. Yet while all married couples can file their taxes together or separately, most save thousands of dollars by filing jointly. That’s because filing separately disqualifies you for some of the most significant tax credits and deductions which include:
• The Earned Income Credit
The Earned Income Credit is responsible for more than $49 billion in tax credits, so you don’t want to miss out. Congress originally approved the tax credit legislation in 1975 as a way to offset Social Security taxes and to provide an incentive for workers. For 2009, you’ll need an AGI (adjusted gross income) of $70,950 if married filing jointly to qualify.
• Child and Dependent Care deductions
The typical American family with two young children spends an average of $14,000 a year on child care, which is almost a quarter of its annual income, according to the U.S. Census bureau. The good news is that some of those childcare costs are tax-deductible; the bad news is that figuring out if you qualify can be extremely tricky. (We have a full-time caregiver for our son, so I know firsthand that you will need to jump though several hoops to get these deductions.) And that’s why TurboTax is an excellent resource for sorting out the complex paperwork to get you what you are owed.
• American Opportunity and Lifetime Learning credits
For 2009, there are several tax credits available to help you offset the costs of higher education by reducing the amount of your income tax, depending on your income. The Lifetime Learning Credit can be used for qualified education expenses for you, your spouse or your offspring while the American Opportunity Credit can be claimed for tuition and certain fees you pay for higher education in 2009 and 2010. For the tax year, you may be able to claim a Lifetime Learning Credit of up to $2,000 (and the credit is $4,000 if you are a student in a Midwestern disaster area). The American Opportunity Credit is worth up to $2,500 for qualified tuition and expenses.
• Student loan interest deduction
The interest you pay on your student loans may also be tax-deductible.For 2009, the tax deduction is phased out if your filing status is married filing jointly and your modified adjusted gross income is between $120,000 and $150,000. Keep in mind that you aren’t eligible for this deduction if your modified AGI is $150,000 or more.
You Had a Baby in 2009
If your bundle of joy lives with you and does not provide more than half of his or her own support, you can claim that kid as your dependent. Additionally, there are other credits your child may qualify for:
• Child Tax Credit
This credit, which can be as much as $1,000 per eligible child, is in addition to the regular $3,500 exemption claimed for each dependent.
• Earned Income Credit
The Earned Income Credit is pretty hefty. You get a credit of $5,657 with three or more qualifying children; $5,028 with two qualifying children; and $3,043 with one qualifying child.
You Bought A Home in 2009
If you’re the primary borrower on your home loan and you make the loan payments, you qualify for a mortgage interest deduction. All you need to take the deduction is your mortgage statements. Other key deductions include property taxes, private mortgage insurance payments, purchase points, home improvements for medical reasons and mortgage interest on a second home.
If you are a first-time homebuyer, you are in luck, too. Thanks the stimulus plan, the maximum credit amount is $8,000 for a first-time homebuyer –– which is a buyer who has not owned a primary residence during the three years up to the date of purchase. There’s also a long-time resident credit of up to $6,500 to others who do not qualify. Keep in mind those buyers must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.
Remember that you can’t e-file if you take this credit. You need to paper file and provide documentation.
You Changed Jobs in 2009
Getting a raise, starting a new job, or retiring from an old one can also have a dramatic impact on your taxes. Here are few final tax-saving tips:
• Keep receipts for job hunting and work-related moving expenses. They are deductible!
• When you rollover your 401(k), have it directly deposited into your new account.
• If you’ll owe taxes on your Social Security benefits, request voluntary withholding to minimize the tax bite.
• To find out if your tax will rate will change with a new salary, compare your last year’s tax bracket to this year’s. Your tax bracket is the rate at which your last dollar of income is taxed. It’s higher than your actual tax rate. But it will give you a good idea of how much of your income will go to Uncle Sam.
As you spend Valentine’s Day with your significant other, make sure you raise a glass of champagne to celebrate love and its many tax benefits!