With the tax deadline creeping up on us, it’s time to focus on some ways to save money on your tax return.
Raising kids is expensive. However, at tax time, there are ways those little bundles of joy can save money. Many people know about the tax credits for kids, but they are unaware about exactly how they work, when you lose them, which deductions and credits you can stack and which ones you need to pick between.
Let’s walk through the tax opportunities available for parents this year.
Tax Savings with Kids
- Child Tax Credit. Most people are familiar with the Child Tax Credit and the Additional Child Tax Credit. However, because they phase out once you hit $110,000 (married filing joint) in modified adjusted gross income it’s very important to keep an eye on your MAGI (or AGI for most people). Because it phases out in $1,000 increments, even $1 extra in AGI will lose $50 in a child tax credit!
- Dependent Care Expenses. Two forms of tax breaks are available for day care expenses and you can claim both. You can use the dependent care portion of your Flexible Spending Account to pay day care costs with pretax dollars. In addition, for costs above the maximum for the FSA, or expenses that you didn’t run through your flex account, you can claim the dependent care credit.
- Tuition. If you have college kids, don’t forget there are two forms of tax savings for tuition, the tuition tax credits or the tuition and fees deduction. Consider both options to see which one results in the higher tax savings using a tax calculator. Here is more on the Tuition Deduction Versus Tuition Tax Credits.
- Kids Tax Returns. When kids need to file a tax return you have two options, file a tax return for the child or attach it to your return with form 8814 if the income is less than $10,000 and only from interest or dividends. When you attach it to your return, qualified dividends or capital gains may be taxed at a higher rate. You can get the lower rate by filing the child’s return separately. You can usually file your child’s taxes for free at TurboTax.
- Kiddie Tax. If your child is filing a tax return, pay attention to the Kiddie Tax. If your child’s interest, dividends, and investment income are over $2,000, part of their income will be taxed at your tax rate instead of the child’s tax rate. It’s a good reminder to make sure that your kids are using their lower tax bracket to their advantage.
- Savings Bond Exclusions. We elected a few years ago to file for the annual savings bond interest option to save money in the future. If you have savings bonds for your kids, you can also consider the Savings Bond Education Tax Exclusion for college.
- 529 Plan Contributions. Many states allow you to deduct contributions to 529 plans. If you missed the end of year deadline for your current tax return, put it on your to do list for this year.
- Roth IRA for Kids. While it won’t save money on taxes this year, the future tax savings could amount to a great deal when you open a Roth IRA for kids. If your kids made enough earned income you can max out the Roth IRA limits for them; it is not required that the kids use their own money for the contributions.
- Claiming Dependents. In addition to the tax credits, you can also claim dependents to get tax exemptions. Most kids and parents struggle to decide who will claim the kids once they are college age. Determine who provided more than half of the support for the child to see if the parents will still claim the child. Ideally, parents and kids should work together during the year to find the most advantageous way to share expenses and benefit from the tax rules.
- Adoption Tax Credit. Are you the proud new parent to an adopted child? You can claim your expenses in the form of the adoption tax credit.
- Health Insurance Tax Credit. The new health insurance premium tax credit is based on household size. If you have kids, you are eligible for a larger tax credit.
Hopefully, if you are a parent, you are finding your tax bill a little bit lower with some of these tax credits and deductions!