Milestones happen throughout your lifetime: getting a driver’s license, having a baby, buying your first house… the list goes on.
While these events may be significant milestones, there are also some important birthdays that carry tax consequences. Here are a few major milestones to keep in mind so there is no surprise come tax time!
FOR YOUR KIDS…
Child and Dependent Care Credit is no longer usable
The Child and Dependent Care Credit helps ease the burden of childcare expenses by providing a credit against your taxes of up to $1,050 for one child ($2,100 for two or more children). But once your child turns 13, you generally can no longer claim it. Child care expenses for your child, ages 13 or older, also no longer qualify for reimbursement under a dependent care flexible spending account (FSA), which allows you to pay up to $5,000 pre-tax for eligible expenses. Both the credit and the FSA are available for disabled older children and other relatives who live with you (such as parents) who require care while you work.
Child tax credit ends
The credit of up to $1,000 for each qualifying child you claim as a dependent ends the year the child turns 17. (Your child’s age on December 31 is used to determine eligibility.)
AGES 19 – 24:
Kiddie Tax ends
“Kiddie Tax” means that your child’s unearned income above $2,100 is taxed at your rate, which is likely to be higher than your child’s rate. Once your child turns 19, or 24 if they are full-time students, Kiddie Tax ends and the unearned income is taxed at the child’s (probably lower) tax rate. Unearned income may include dividends, interest, capital gain, unemployment benefits, some taxable scholarships, survivor pensions and even alimony.
Make catch-up contributions to retirement plans
You can contribute a certain amount to your retirement plans each year, but once you turn 50, you can contribute an extra $6,000 to your 401(k) for a maximum contribution of $24,000 for 2016, or an extra $1,000 to your traditional or Roth individual retirement account (IRA) for a maximum contribution of $6,500 for 2016.
Make catch-up contributions to a health savings account (HSA)
At 55, you can also make a catch-up contribution of an additional $1,000 to your HSA. Taxpayers are normally limited to contributing $3,350 for individuals or $6,750 for family plans for 2016.
Take from retirement accounts without penalty
Under age 59, you will face a 10% penalty for early withdrawals from your retirement accounts, unless an exception applies. But by 59½, you can make withdrawals from your retirement accounts for any purpose without any penalty.
Make non-medical withdrawals from an HSA without a penalty
If you use HSA funds for non-qualified expenses, you have to pay income tax on the withdrawal and incur a 20% penalty. However; the penalty is waived after you turn 65, meaning the HSA can function like a tax-deferred savings account. (However, distributions are still taxable if not used for qualified medical expenses.)
Take required minimum distributions (RMDs)
You must take a required minimum distribution from your traditional IRA when you turn 70½. If you do not withdraw the required minimum amount you will be subject to a 50% penalty on the minimum amount you were required to withdraw. Your first RMD must be withdrawn by April 1 of the year following the year you turn 70 ½. After that, the withdrawal must be made by December 31 each year. Employer-sponsored retirement plans, like a 401(k), also require a minimum distribution. Hhowever, if you are still working beyond the age of 70½ at the organization sponsoring your 401(k) , the requirement will not kick in until retirement.
The tax consequences of important life milestones have implications on your financial landscape. Make the most of your tax situation – connect with a Tax Advisor who can help you understand your options and suggest alternatives when your situation changes.