CUT YOUR TAXES FROM CRADLE TO GRAVE

The big events in your life can save you money — or cost you if you’re not careful. Bone up on the tax implications of marriage, kids, divorce, retirement and you’ll be a little wiser, a little richer.

You get married. You have children. You buy a house. You send kids to college. Profound events all of them, and every one has tax implications. Add to that your financial birthdays — ages reached that are financially significant because of tax or retirement reasons — and you have a calendar of decisions to be made.

Here’s a rundown of how your life and your taxes intersect.

Getting Married

Let’s start with the most glorious day of your life — the day you are married! It’s a day filled with tax consequences.

We’ll start simple. There’s probably going to be a name and/or an address change. You’ll have to notify both the IRS and the Social Security Administration. You’ll have to File Form SS-5 with Social Security Administration. Get it by calling 1-800-772-1213. The IRS Form 8822 can be downloaded from the IRS’s Web site or you can call 1-800-829-3676.

Once you’re married, you can no longer file taxes as single. Your marital status is determined on the last day of the year. So, if you marry on December 31, the IRS considers you married all year. If you’re divorced on December 31, the IRS won’t let you file jointly or as married filing separately.

BIG tax consequences! Once you’re married, you’re subject to either a marriage bonus or a marriage penalty.

You get a marriage bonus if only one of you works and earns a salary. That’s because you can now file jointly and the rates for joint filers are less than those for single filers.

For instance, in 2003, single filers are taxed at a 28% rate on income over $68,800. Joint filers don’t reach that level until their taxable income is over $114,650. So, if I’m the only one working and have a taxable income of $112,850, I save $1,321.50 in taxes if I marry before the year-end. That’s 3% of the difference between $114,650 and $68,800. The 3% represents the savings between the 28% bracket and the next lower bracket, 25%.

On the other hand, if both of you are working, there’s a marriage penalty. That’s because when you file jointly, your spouse’s first dollar earned is taxed at your highest marginal rate.

For instance, if both you and your fiancée had taxable incomes of $141,250, each of you would pay $34,296 for a total of $68,592 in federal income taxes. Filing jointly, your total taxable income would be (all other things unchanged) $282,500. The tax on that would be $74,670.50. By postponing a Christmas wedding until New Years, you’d save $6,078.50 — enough to put a real dent in that honeymoon bill!

To be sure, Congress gave married couples a small break in the 2003 tax bill — expanding the standard deduction for married couples filing jointly to $9,500, exactly twice the standard deduction for single filers.

Filing married separately doesn’t help. The IRS just cuts the joint numbers in half. But it may be the way to file if there’s a floor, the 7.5% medical or the 2% on miscellaneous itemized deductions, that one spouse could meet but not both together.

Whether you get a bonus or a penalty, you might want to consider amending your Form W-4 to adjust the allowances to reflect your new potential tax.

Having Kids

Now that you’re married, you might as well put some real joy in your life! Ask any parent if having a child has consequences.

But, let’s look on the bright side.

Each child gives you an additional exemption deduction of $3,050. If they’re under age 17, you’re also offered a tax credit of $1,000 per child. A tax credit is a dollar for dollar reduction in your tax — much better than a deduction. (A note: You start to lose the credit once your income exceeds $110,000 for joint filers and $75,000 for singles.)

The time to plan for kids is before you ever thought of having them. But, better late than never.

Once you have them, you must put aside money for their educations. Consider a Section 529 account if you want to save for their college expenses on a tax-exempt basis. In my opinion, that’s the best way to go.

Consider a Coverdell Savings Account if you want to save for college or elementary and secondary school expenses on a tax-deferred basis. These are the old Education IRA accounts, but you can now contribute up to $2,000 a year. Make sure all Coverdell money is withdrawn by your named beneficiary by age 29, or name a new, younger beneficiary. Otherwise, the beneficiary will face ordinary income tax and a 10% penalty on her next birthday.

And don’t forget: Coverdell accounts are subject to income restrictions, and high-income taxpayers are not eligible to use them. Annual income limit for full eligibility is $95,000 for single taxpayers and $190,000 for joint filers.

Be absolutely certain to read A Roth IRA for Your Kids? Yes, You Can! on this web site for a super way to save money for your children’s futures.

Lastly, shift some income to the kids. Until they’re age 14, they’ll be subject to the “kiddie tax.” That means that if they don’t have any earned income, the first $750 will come to each child tax free, and the next $750 will be taxed at their rate. All income over that will be taxed at your highest marginal rate.

A little savings until age 14 — a lot of savings after that. That’s when all of their income is taxed at their rate . . . usually lower than yours.

Buying a House

Another big step. Now you probably will itemize your deductions rather than take the standard deduction. Your interest and property taxes will both be deductible. Remember to deduct any interest and taxes paid (not just put aside as a reserve) at closing that may not be reflected on any Form 1098s. Also, don’t forget to take any points you paid at closing. You can amortize them over the life of the loan or deduct them all at once on Line 12 of your Schedule A.

When you sell the house, you can exclude as much as $250,000 in gain ($500,000 on a joint return) if it was your principal residence for two of the last five years. The old rules about replacing the house or being age 55 no longer apply. If you qualify, you need never buy another house to get the exclusion.

Divorce

You married, had kids and bought a house. Guess what’s coming next for some people?

In the United States, half of all marriages end in divorce — and 62% of first marriages end that way. Lots of financial and tax considerations.

Retirement

More tax considerations. Do you finance your retirement with tax-qualified deferred money like a 401(k) or traditional deductible IRAs, or do you use non-deductible but completely tax-free Roth contributions?

How old are you? At age 50, you can put more into your retirement plans. At age 55, you can avoid the 10% early withdrawal penalty on distributions from a qualified retirement plan or annuity if you leave your employer. Once you’re 59½, the 10% penalty no longer applies.

At age 62, you can start collecting Social Security at a reduced rate. As much as 85% of that income may be taxable, depending on your other income.

At age 70½, you have to consider taking minimum distributions from your retirement plans. You can postpone the first distribution until the next year. But then you’ll have to take 2 distributions in that year. That may push your income higher and subject more of your Social Security to potential tax.

Estate Planning

It’s been said that the only two certainties in life are death and taxes. Almost every step you take during life has tax consequences. There are even significant tax consequences to you and your beneficiaries at death.

That’s why estate planning is so important. You’re going to need a will or a living trust to dispose of your assets. Some assets, such as retirement plans and life insurance, go as directed by their beneficiary designation, even if your will specifies a different beneficiary. Each state has its own rules for state inheritance taxes. And then there’s the federal estate tax.

There’s no federal estate tax if your estate is worth $1.2 million or less. This “exclusion amount” increases until 2010, when it becomes unlimited.

But, we’re talking about the IRS here. Die on December 31, 2010, and you pay zero estate tax no matter how big your estate. Die on January 1, 2011, the next day, and the exclusion amount is scheduled to drop down to $1 million again. (And who knows what Congress will do after that.)

That’s why it’s so important to sit down with a professional with this one. It doesn’t affect just you, it affects those you love.