An unpleasant surprise for a parent’s taxes

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 Q. I had an unpleasant surprise with my taxes when could no longer count my children as dependents. No one ever mentions this when it comes to planning. There is a $3,950 swing. So instead of me owing $1,700 and change to the federal government for 2014, I owed $5,650 to the federal government because my child’s deduction was gone. I’m planning to adjust my withholding to have more money taken out and to increase pre-tax contributions to my 401(k) plan. Do you have other strategies I can use?

A. Tax surprises aren’t fun.

As you get older, you may find several changes to your tax return. Losing your children as dependents as they become adults is just one of them. You may also find big changes when you pay off your mortgage because you no longer have mortgage interest to deduct, or when you start taking taxable distributions from retirement accounts.

That means you should plan ahead.

Your question highlights the potential drawback of being a do-it-yourselfer, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

Working with a qualified tax professional who can help with longer-term planning for your return might be a good idea for you.

Maye said having a dependent child does not reduce one’s tax liability dollar-for-dollar, but at their marginal tax rate.

He offered this example: If someone was in the 25 percent marginal tax bracket and they lost a $3,950 exemption, the incremental federal tax hit would be $988. not $3,950.

“The reader likely has other moving parts on their tax return that created the additional $3,950 in taxes,” he said. “Was it the dreaded AMT? Did they book larger-than-planned short-term capital gains?”

Clare Wherley, a certified financial planner and certified public accountant with Lassus Wherley in New Providence, also said it’s unlikely that the swing in what you owed can be attributed solely to losing the deduction, although you didn’t say what your tax bracket it.

“The exemption is deducted from your adjusted gross income to reach your taxable income,” she said. “The tax you pay is calculated on your taxable income and the loss of an exemption means your taxes will go up but not by the full amount of the exemption.”

The loss of an exemption for a child is a difficult event to predict, she said.

“Only if a child is a full-time student can the exemption be claimed through the child’s age 23,” Wherley said. “However, if the child remains in the parent’s house-hold and doesn’t have gross income greater than the exemption amount, that child may still be claimed by a parent. There is also the assumption the parents are paying for more than half of the child’s support.”

In looking for strategies to save one your tax bill, Wherley said increasing your 401(k) contribution is probably the best strategy.

“Not only will it reduce your current taxable income, but you are saving more for your retirement,” she said. “Just remember, though, your $3,950 additional contribution will reduce your taxes less than that amount, depending on your tax bracket.”

Other strategies, Maye said, include harvesting tax losses, minimizing short-term capital gains and using tax-exempt investments in taxable accounts.

If you use a tax preparer, don’t just assume he or she will know all the relevant facts in planning for next year’s taxes, Wherley said. When you talk to the preparer, your conversation is often just focused on getting all the information needed to prepare the current return.

“Before you leave you should ask for a discussion of the coming year,” she said. “Most organizers used by tax preparers ask what will be different in the coming year. You need to think ahead and be prepared to identify what will change in your situation.”

And one final nugget from Wherley: The dependency exemption is phased out for taxpayers in higher tax brackets — something many taxpayers don’t realize until it happens to them.

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This post first appeared in March 2015. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.