Having children is a wonderful experience that is priceless in so many ways! But do they cost you a lot! Fortunately there is some tax help for parents in the form of deductions and claims. Robert Meighan, vice president at Turbo Tax, has listed some great tax tips for parents:
- Open an IRA in your child’s name. Once your child starts to earn money, for example – paper route, or babysitting, you can open an IRA account for them. Imagine what a few hundred dollars growing in an account will look like once your child is ready to retire? You can also get your child in the habit of saving for retirement early on!
- Contribute to a Coverdell Education Savings Account (ESA). You can put up to $2,000 a year into an ESA for any beneficiary. The earnings in the account are tax free if they are used for qualified education expenses, including elementary and high school expenses such as educational software. What a great present it could be for your child to help them with their college expenses. And the fact that you can use the money for elementary and high expenses as well can be huge.
- Contribute to a 529 plan. Contributions are not deductible on your federal taxes but may be on your state taxes if you take part in your state’s plan. The limits are higher than the Coverdell. Earnings grow tax free and payouts are tax free when used for qualified education expenses. This is an account you can open once you know you are having a child. You pick the beneficiary of the funds. Unused money can also be transferred to another individual (should your child be fortunate enough to get a full scholarship for example). You can also open one up for a niece, nephew, or grandchild (or any other person really).
- Use pre-tax dollars for childcare. Many companies offer child care flex spending plans. With these accounts you can put away up to $5,000 of your paycheck before taxes for qualified childcare expenses. Child care is expensive so any tax break you can get is worth looking into! We used a childcare reimbursement account when my son was in daycare.
- Adjust your W-4 at work. If you have a newborn, make sure you adjust your tax withholdings. Claiming an additional person can increase your take home pay. Don’t give the government a free loan when you can have the extra money in your paycheck.
- Child tax credit. Newborns could give you a $1,000 tax credit that can be used up until your child turns 17.
- Get a social security number for your newborn. Make sure you get all your paperwork in once your baby is born. A social security number is important in making sure you can claim the deductions and credits you are entitled to!
- Adoption. Have you adopted in 2009? You may be able to claim up to $12,150 on your taxes.
As always, check with a tax professional to make sure you qualify for a specific deduction/credit. You can find more tax tips on the Turbo Tax blog Tax Break.
Do you know of any other tax breaks for children?