When you’re a busy parent, time flies fast!
If you can find time to check out a few tax tips, the money you save may be well worth your while.
Take a look at these tax tips especially for the child-rearing years:
Check your child’s Social Security number
Children can mean substantial tax breaks, but only if they have Social Security numbers.
Previously, you could wait until the kids were older before you got Social Security numbers for them.
In fact, many people didn’t get numbers until they were old enough to start working.
Now, you cannot take a dependency exemption for your child unless you have a valid Social Security number before you file.
The only exception to this rule is if the child was born and passed away in the same year.
Double-check your child’s number after entering it on your tax return, and make sure the child’s name is spelled exactly as on his or her Social Security card.
The IRS cross-checks this information and any variance can delay the processing of your return until you correct the information.
Don’t assume your filing status is Single just because you’re single
If you’re single, but you maintain a home for a child, you may qualify for a more favorable tax filing status than Single.
If your spouse passed away during the tax year, you can still file as married filing jointly for this year.
If your spouse died in one of the previous two tax years, and you maintain a home for a qualifying child or stepchild, you may qualify to file as Qualifying Widow(er) With Dependent Child.
For example, if your spouse died in 2012, you can file a joint return for the 2012 tax year.
You may be able to file as a Qualifying Widow(er) for 2013 and 2014 if you meet the qualifications.
The next best filing status if you are unmarried and have a child living with you may be Head of Household.
To file as Head of Household, you must pay more than half the cost of keeping up a home for the year, be unmarried or considered unmarried on the last day of the year, and have a “qualifying person” – such as your child – living with you for more than half the year.
You will generally pay less tax by using the Qualifying Widow(er) With Dependent Child or Head of Household filing status than you would by filing as Single.
Consider starting a retirement fund for your child
Starting a retirement fund for a child is not as crazy an idea as it may sound.
The most important factor in an investment plan is time, and your child will never have more of it than if he or she starts investing now.
You may want to open a traditional Individual Retirement Arrangement (IRA) for your child.
When your child starts to earn income, the child can make contributions and reduce his or her taxable income.
Another option is to open a Roth IRA for a child. He or she won’t be able to deduct contributions now, but any withdrawals after retirement will be tax-free.
If your child’s retirement seems too far away to worry about, consider that IRAs can be used for more than just a payday in old age.
For example, your child may qualify to withdraw IRA funds without penalty for higher education expenses, medical insurance when unemployed, and up to $10,000 for a first-time home purchase.
Plan which parent is taking a dependency exemption for each child
It’s not always easy to determine who gets to take the dependency exemption for a child, especially if the child spends time at more than one parent’s house and receives support from both of them.
According to the IRS, if you live with the child for more than half the year, you can take the dependency exemption for the year.
You can relinquish the right to take the dependency to the other parent if you choose. This may be a good idea if the other parent is in a higher tax bracket.
Don’t miss the Earned Income Tax Credit if you may qualify
The Earned Income Tax Credit (EITC or EIC) can pay you back a substantial amount of money – up to $6,143 for 2014.
However, some people miss this credit for one of two reasons.
They either think the Earned Income Tax Credit is for very low-income taxpayers, or they mistakenly think they can’t claim a child for purposes of the credit if their ex-spouse is claiming the dependency exemption.
The income limits for the EITC have risen in recent years, especially for people with more children.
For 2014, taxpayers with three or more qualifying children can earn up to $46,997 ($52,427 if filing jointly) before the credit is completely phased out.
Your adjusted gross income (AGI) must also be less than the earned income limit.
The amount of your EITC, as well as the income levels at which the EITC is phased out, are significantly affected by whether you have one, two, or three or more children.
Make sure you claim all the children you should. You may be able to claim a child for the EITC, even if the child’s other parent takes the dependency exemption.
Only the parent with whom the child lives can claim that child for the EITC. There is no support test for this credit.
How has parenting changed your money management style?