From child care to school tuition, parents face extraordinary expenses throughout the year. But at tax time, several credits and benefits are available to provide some relief. 415 Group Supervisor Evan Hudson, CPA, explains the opportunities.
Several tax breaks are available to new parents. Two of the items listed in this article — the child tax credit and the educational benefits for a 529 plan — both partially changed due to tax reform. The child tax credit will increase and be available to higher-income taxpayers, and 529 plans will be more flexible now.
Previously, 529 plans were only available to help pay for college expenses, but now you can also use them to pay for private elementary and secondary school tuition. One thing this article doesn’t mention: when you contribute to a 529 plan, most states give you an adjustment on your state tax return. In Ohio, as of 2018, you receive a maximum of $4,000 per child. For example, if you have two children, and you contribute $8,000 to a 529 plan ($4,000 for each child), you’d receive a $8,000 reduction of income on your state return. Most states offer similar benefits for contributing to those plans.
Some of these tax breaks for new parents, like the child tax credit or the adoption credit, are straightforward. The credit is what it is. But other items mentioned here, like 529 plans and the ‘kiddie tax,’ can get more strategic, so keep your accountant informed.
It’s always important when you’re using an accountant or financial advisor to be in contact with them throughout the year. Don’t view them as someone only available to you once a year for compliance. Your accountant is someone who you can and should bounce off ideas. Particularly with major life events — like marriage, divorce, children, college or other big shake ups — it’s always good to reach out to see what, if any, impact that will have on your tax liability. At 415 Group, we’re always available if you have any questions or concerns.
New parents have their work cut out for them. Not only are they dealing with lost sleep, they also face the extra cost of raising a child. At least there are a lot of potential tax breaks available to them. Check out this list and share it with any new parents you know.
1. Child Tax Credit
Tax law changes this year not only double the size of the Child Tax Credit, they make it available to more parents than ever before. The credit increases to $2,000 from $1,000 (with $1,400 of it being refundable even if no tax is owed). Meanwhile, the eligibility phaseout threshold increases sharply to $400,000 from $110,000 for married joint filers (and to $200,000 for single taxpayers).
2. Child and Dependent Care Credit
If you pay a nanny, babysitter, daycare or a relative to take care of your child while you and your spouse are at work, you can claim the Child and Dependent Care Credit. It's up to $1,050 on $3,000 in expenses for one child and twice that for two or more children. The key is that you and your spouse (if you are married) must both be working, and you can't claim expenses for overnight care.
3. Below the kiddie tax threshold
If you have property that produces income, such as bonds, stocks, mutual funds, interest or realized capital gains, you can lower your tax by transferring a certain amount of that income to your children. Why? Your child has a lower tax rate than you do on unearned income. This works up to a certain dollar limit before "kiddie tax" rules come into play.
4. Adoption Credit
About 135,000 children are adopted in the U.S. each year. If you are welcoming an adopted child into your family, the Adoption Credit can be claimed on up to $13,840 in expenses, such as fees, legal counsel and court costs.
5. Educational benefits of a 529 plan
There are many provisions in the tax code to help cover the high cost of education. Consider establishing 529 college savings programs for your new addition. While contributions are made with after-tax dollars, any investment gains are tax-free as long as they're used to pay qualified education expenses. The tax reform passed last year now also allows you to use these funds to pay private elementary and secondary school tuition as well as college.
As always, should you have any questions or concerns regarding your situation please feel free to call.