Give Your Clients a Mid-Year Tax Checkup

When you met with your clients during tax season, you probably did more than go over their 2015 tax returns. You may have also done some advance tax planning for 2016. For example, because of changes in a client’s personal situation, you may have recommended that he or she file a new Form W-4 to increase or decrease income tax withholding. Similarly, you may have advised a change in a client’s estimated tax payments.

However, even a few months can bring big changes in a client’s life that can significantly affect tax plans made earlier in the year. In fact, at this time of year, you may want to suggest to your clients that they take time for a mid-year tax checkup. You can start the process by providing clients with a checklist of events that could trigger a change in their expected tax bill for 2016. For example:

Marriage: Clients who get married in 2016 may need to increase or decrease withholding or estimated tax payments, depending on their personal situations. By switching from single to joint filing, the newlyweds may face a “marriage penalty” or enjoy a “marriage bonus.” A marriage penalty exists when a couple’s tax liability on a joint return is greater than their combined liabilities would be if they filed as single taxpayers. A marriage bonus exists when a couple’s joint return liability is smaller than the sum of their tax liabilities as singles. Whether a couple will suffer a marriage penalty or enjoy a marriage bonus depends on a variety of factors, including their individual incomes, the number of their dependents, and their deductions. However, as a rule of thumb, a couple whose earnings are split more evenly than 70-30 will pay a penalty. One-earner couples and those couples whose earnings are largely attributable to one spouse will generally receive a marriage bonus.

Tax law changes have taken some of the sting out of their marriage penalty by widening the 10 percent and 15 percent tax brackets and increasing the standard deduction for joint filers. However, those changes did not eliminate the marriage penalty. The tax rate structure still imposes marriage penalties on taxpayers in higher brackets. And the increase in the standard deduction provides no benefit to taxpayers who claim itemized deductions. Moreover, the tax law changes do not address marriage penalties arising from other sources, such as the phase-outs of tax deductions and credits that may be triggered when income is combined on a joint return.

Divorce: A client who divorces in 2016 will go from joint to single filing status. Again, this may mean a tax increase or a tax decrease, depending on the client’s circumstances. For example, if the client is making deductible alimony or separate maintenance payments, that income will be shifted from the client’s return to his or her ex-spouse’s return. On the other hand, a client may face a tax increase because of the loss of dependency exemptions and child tax credits.

New baby: As long as the new addition to the family arrives before next Jan. 1, a client will be entitled to claim additional dependency exemption for 2016. The client may also qualify for a child tax credit of up to $1,000 for the year. Clients should be advised, however, that the child tax credit is subject to a phase-out once income tops $110,000 on a joint return or $75,000 on a single or head-of-household return.

Child’s graduation: A child’s high-school or college graduation may mean the loss of a dependency exemption for 2016. A client can claim a dependency exemption for a child under age 24 who is a fulltime student for at least five months during the year. However, the client must provide more than half the child’s support for the entire year. And, if a child lands a good-paying job after graduation, the client may not meet the support test.

Child’s wedding: A client may meet all the tests for claiming a dependency exemption for a child who marries during the year. However, the dependency exemption cannot be claimed unless the newlyweds agree not to file a joint return for 2016 (except to get a refund).

Spouse returns to work: A spouse’s return to the workforce may require withholding or estimated tax changes. For example, if the client’s spouse claims a withholding allowance on his or her own Form W-4, the client will have to reduce his or her withholding allowances accordingly. Moreover, the client may need to increase withholding or estimated tax payments if the couple will face a marriage penalty as a two-earner couple. On the other hand, if the couple pays for the care of a child or children under age 13 while they work, they may qualify for a child tax credit that will reduce required withholding or estimated tax for the year.

Crunch the numbers: Once a client has reviewed your checklist, sit down with the client and plug the updated facts and figures into the Form W-4 or Form 1040-ES worksheets. By making any necessary upward or downward withholding or estimated tax adjustments now, you can ensure your clients of a healthy tax outcome for 2016.

For more details on how life changes can impact your clients’ tax returns, check out this series on the Tax Pro Center.

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