1/19/2012 1:28 PM ET|
The tax joys of parenthood
Children can be a boon at tax time, offering a variety of ways to reduce what you owe. Here's how taxpaying parents can benefit.
Is there a new baby in the house? That's good news in many ways, especially at tax time, when the chip off the old block will help you chip away at your tax bill.
A growing family makes you eligible for a variety of tax savings. You get an additional tax exemption, may be eligible for several tax credits and can use tax-favored ways to save and pay for Junior's college. You might even be able to lower your taxes by shifting some of your higher-taxed income to your youngster, either as an asset gift or as salary if you own your own business.
Here are some common tax matters every new -- or experienced -- parent needs to consider.
The first tax-return item a taxpayer encounters is the choice of how to file. For many couples raising kids together, this is easy. The married-filing-jointly option offers a larger standard deduction and allows some tax breaks that are denied to unmarried filers.
If, however, you are raising children alone, don't shortchange yourself by choosing the wrong status. You can file as a head of household if, for more than six months, you provided more than half the cost of keeping up a home for yourself and your kids. Tax rates and the standard deduction for head-of-household filers are more favorable than those for the single or married-filing-separately categories.
Parents who have lost spouses also have a choice. You may file as a qualifying widow or widower with a dependent child for two years after the year your husband or wife died. This status gives you the same filing consideration afforded to married filers.
Exemptions, aka dependents
More child-related tax savings come from the personal exemptions you claim on your return. Each dependent is an exemption. The Internal Revenue Service sets an annually adjusted amount ($3,700 apiece on 2011 returns) that you multiply by the number of your exemptions and subtract from your income.
Determining whether your child is a dependent is not a problem when you have young kids at home. But what about when they earn their money from an after-school job or are off at college? While you may have to do a little figuring, especially to see if your young worker needs to file his or her own tax return, this generally won't invalidate your child's status as your dependent. The key considerations are whether you are the child's primary source of support or if he or she is a full-time student.
Single parents have some other matters to consider. Where a formal divorce decree is involved, be sure you follow the custody rules set out there. They determine who gets to claim the children. When custody is shared, parents must decide who claims the kids.
Your growing family could pay off via several tax credits. The great thing about tax credits is that they reduce your tax liability on a dollar-for-dollar basis. A credit of $500 could cut your $1,000 tax bill in half. If you owe no tax, some credits will even get you a refund.
The easiest child-related credit to claim is called simply that, the child tax credit. There are no records to keep or extra forms to file to get a $1,000 credit for each child younger than 17 who's claimed as a dependent on your tax return.
If you claim tax relief for more than one kid, you must fill out Form 8812 to compute the additional child tax credit, but the paperwork could be well worth it. This tax break allows filers who owe little or no taxes to get a refund check from the IRS.
Working parents who put the kids in day care can file for the child- and dependent-care credit to recoup some of those costs -- up to $3,000 spent to care for one youngster under age 13, and $6,000 for two or more preteens.
And if your child arrived via adoption, there's a tax credit for that, too.
More from Bankrate:
- Ensure your children are a tax credit to you
- Video: Child care tax credit
- Let Uncle Sam help pay for college
College costs are skyrocketing, prompting many parents to start saving as soon as the little one arrives. Uncle Sam offers several tax-favored ways to help.
The American opportunity credit, a reformulation of the previous Hope credit, covers costs for the first four years of higher education and is worth up to $2,500. Even better, a portion of the American opportunity credit is refundable, meaning even if you don't owe the IRS anything, you could get some cash back. And the lifetime learning credit, which could cut $2,000 off your tax bill, is still around as well.
Credits usually are more tax-beneficial than deductions because credits cut your tax bill dollar-for-dollar. But don't discount the tuition and fees deduction. This tax break lets you subtract up to $4,000 of eligible schooling costs from your income.
And a Coverdell education savings account allows parents (or grandparents or even just friends) to put away up to $2,000 per year (total, not apiece) for a youngster's schooling.
Beware the kiddie tax
One former child-related option to lower your tax bill, however, has been dramatically reduced. Previously, many parents shifted some of their higher-taxed investment income to their young children so the earnings would be taxed at a lower bracket; for example, falling from a possible 35% rate to the youngsters' usually 10% or 15% bracket.
But the so-called kiddie tax limits this practice. When a young investor's 2011 or 2012 earnings exceed $1,900, the tax rate applied to those excess earnings is the parents' -- not the child's. The higher tax rate remains in place until the child turns 19, or 24 if the young investor is a full-time student.
So, Mom and Dad, keep an eye on young Jimmy's or Jane's assets, because you could be paying the taxes on them.
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VIDEO ON MSN MONEY
Tax cuts are def not the demise of this country finacially. Pointless wars, politicians and their redic bonuses and vacations, welfare.. now there is some reasons as to what is racking up massive, unnecessary bills. Which would you prefer? A single mother who catches a tax break once a year OR a single mother with no tax break signing up for welfare, food stamps, etc.. for years on end taking from YOUR pay check. Just sayin!! Not everyone is so lucky to make 50,000+ a year because Mommy and Daddy paid there way through life the first 25 years to obtain that excellent college education and what not. Let's raise taxes for the rich and start drug testing for welfare.. that could be a good start!
What's maddening is that once your child turns 17 no more $1000 credit! OUCH! I don't understand why the IRS set the cutoff age at 17. It's not like you don't have as much to pay for when they turn 17, in fact sometimes there's even more expenses at that age! So frustrating!
I really don't think this article was intended to suggest people "have more children" to get more money back in taxes. Obviously the cost of diapers, clothing, schooling, etc. exceeds your tax returns. Me and my husband have 3 children under the age of 4 and I can vouch for that. We both work - my husband 50+ hours per week, I work 20 hours a week and go to school and we do everything we can to keep our family afloat. We "get by" and are able to put a little in savings. I sincerely hope no one is uneducated enough to have children simply for tax refunds. My hope is everyone looks at their personal financial situation and how many kids they can reasonably afford to have. Three is it for us - my husband has a vasectomy scheduled. Be educated!
Let me add that I meant those that do not work and just stay at home getting knocked up. I didn't mean those that love children and have them.
America, a place where a single woman can have 5 children with 5 different dads and then claim each one of them on her tax return simply because she worked a "seasonal" 3 month long job. I know someone like that, and it irritates the heck out of me.
I am a 30 year old military wife with ONE child. Though I love motherhood, and love my child I could not see having 4 more. We've discussed possibly one more, but the way the economy is today I feel that if we did have even just one more then that would make it all the more difficult to help our child in the future. I never had hand outs, nor did I have help with college expenses other than a student loan (which I had to repay). I hope to lessen the burden on my own child by being able to help her with those types of expenses. It makes me wonder how on earth do these people having so many children plan to help their own children become responsible adults in such a harsh difficult world. Or do they even put this into consideration? I would think these kids would follow their parents "examples".
I was raised by a single mother who worked her a** off. She never once got state help, nor did she apply for food stamps. Instead she worked a full time and a part time job as well as managing to complete 2 associates degrees and a bachelors degree. My mom worked HARD. I learned about hard work through my own mother. I have also heard my mother on many occasions talk about how she wished she had started a college fund for me as a baby, even if it meant putting just a little in each month to help. She is one of the reasons I think so much about my own childs future.
Not only are there future college expenses, but there are activities as well. Obviously people with no money and 5 kids cannot afford a $100 soccer program for each child.
I do look at the child tax credit as a "handout". However we now look at it as a usefull handout that we have vowed to continue to deposit into our daughters "college/future" account each year as long as we continue to get it. We don't blow it, we set it aside for her.
These are my oppinions and if no one agrees so be it, this is the way I look at things, and I don't expect everyone to like what I have to say.
some of the claims these comments make don't manke any sense.
why do parents get a tax break for children? its quite obvious....children are a BOOST to the economy!!! the jobs and economic boost created by a child FAR OUTWEIGHT the tiny tax breaks you get for them. how many jobs would there lost in child care, health care, safety seats, clothes, education, dental work, toy companies, housing, etc.....if there were no children?
my two children have cut my federal income taxes about 25%. the money i poor into the economy based completely on them is AT LEAST 5-10X that amount.
those of you whining about a child tax credit just aren't seeing the big picture...period.
also....those of you complaining about should go ahead and denounce ANY tax break. why should you get a tax break for buying a house, student loans, charitable contributions, etc.
child tax breaks are a good thing, but i tend to think MOST tax breaks are a good thing.
I agree with marinmom1 regarding the use of religion as a ridiculous way to avoid paying taxes.
HOWEVER, she is pretty judgmental and moronic to label people as burdens to society when they are supporting their growing family and paying for their needs. Those who do not work and expect/receive assistance are the real drains on society !
One of the things lawyers do is to look at the intent of laws; they consider what the writers of laws actually meant at the time. If you look at the context surrounding the 16th Amendment, it's pretty clear that it was never intended to tax people's wages directly.
You also have to consider that when you are forced by the IRS to file a tax return, they are violating the the 5th Amendment, which provides protection against self-incrimination. Also, they violate the 4th Amendment when they seize your assets for not paying.
Most people don't realize that we didn't even have an IRS until 1913 (the same year the Federal Reserve was created). The revenues collected do NOT cover all the costs of operating the federal government. Much of the money comes from "borrowing" -- selling bonds (largely, to foreign governments) -- and "printing" (money creation by the Federal Reserve Bank). Having said that, where do our taxes go? If we are paying them, do we have a right to know where our money is going?
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