Got Kids? How To Make The Most Out Of Your Tax Deductions

Children are wonderful. They can even help you save on taxes! 😉Get the scoop on tax deductions for children right here.

Some of my clients have become first-time parents this year (CONGRATS to them!) . Others have been doing the parenting thing for quite a while. Either way, kids are a part of life for a lot of us, entrepreneurs and employees alike. So are tax deductions for kids.

And one thing that entrepreneurs and employees have in common: we all pay taxes, and we’d all like to pay a bit less!

I’m not a parent myself, but I do have many kiddos in my life. Between my ten siblings, I’ve got four nephews and four nieces. I’m also an honorary auntie to countless babies of my special friends. So you could say that as an adult, I’ve had experience with kids. As an accountant and tax preparer, I’ve definitely learned a lot about what kids mean when it comes to taxes.

Or to be more specific, I’ve learned how tax deductions for kids can be a pretty significant write-off! 😉 

Here’s the real deal. Taking care of kids costs money. That’s just a fact of life. But what if you as the parent or caregiver could get some of that money back come tax time?

There are plenty of perfectly legit ways to make this happen! 

I see you leaning in, friend! Even if you don’t have kids, you surely know someone who does and might want to know what I’ve got to share. So if this has piqued your interest, read on! 

Let’s get into the most tax-friendly ways to meet your kids’ needs and maximize your tax deductions for kids while you’re at it.

1-Open a flex-plan for childcare expenses. These accounts let you divert up to $5,000 a year of your salary into a special tax-advantaged account. You can then tap into this account to pay childcare bills. The limit for Flex accounts is $5,000, but the credit can be claimed against up to $6,000 of eligible expenses if you have two or more children.

Even if you run $5,000 through a flex account, you could qualify for 20 to 35 percent credit on up to $1,000 more.

Generally, sign-up for flex accounts are limited to “open enrollment” in the fall. But most companies let you make a mid-year change for certain “life events,” including the a new baby.

2-Hold on to Day Camp receipts. Day camps are fantastic for working parents. They’re fun and educational for the kids, and they free up parents to focus on their jobs and businesses. The IRS seems to think day camps are a great childcare option, too,as deductions are available for Day Camp expenses!

Pro tip: only day camps qualify, not overnights “sleep away” camps, so keep this in mind.)

3-Start saving for college TODAY. Sure, they might be babies now, but college will be here before you know it! So it’s never too early to start saving. A 529 Education Savings Plan might for you. Contributions to these plans are not deductible on your federal taxes, BUT earnings grow tax-free, and payouts are tax-free if the money is used to pay qualifying college bills. I personally find that pretty awesome (especially since as write this, I am still paying off my school loans)! 

4-IRAs for Kids. We all know the basics of compound interests and IRAs. Imagine the money your kids could have in 10, 20, 30 years if they started an IRA today! So here’s the scoop on an IRA for kids. Your child must be under 18. There is no minimum to open an account. All contributions must come from earnings from a job or self-employment (gifts aren’t included.) Contributions can match the minor’s earnings (e.g., if a child earns $1,000, then only $1,000 can be contributed to the account).

Pro Tip: A Roth IRA is an ideal choice for kids in a low tax bracket, where a tax deduction is of little value. There is no up-front tax break, BUT their savings will benefit from years of tax-free growth, and withdrawals in retirement are tax-free.

5-Education Savings Account (ESA) for your newborn. Up to $2,000 a year can go into an ESA for each child. Again, there is no deduction for deposits, but earnings are tax-free if used to pay qualified education expenses. ESA money can pay for elementary and high school expenses (even a computer used for school and educational software), as well as for college costs. As a side note, the right to contribute to an ESA phases out as income rises from $95,000 to $110,000 on single returns, and from $190,000 to $220,000 on joint returns.

6-Kiddie Tax. If you are an S-Corp and already run payroll, you may qualify for the “kiddie tax.” For 2018, the first $1,050 of a child’s “unearned” income (income that is not earned from a job or self- employment) is tax-free. (This is thanks to the child’s standard deduction). The next $1,050 is taxed at the child’s rate (probably 10 percent). Any additional investment income is at the tax rates used for trusts—as high as 37 percent. Under current rules, the kiddie tax applies until the year a child turns 19 (or 24 if he or she is a dependent full-time student). 

These are just a few suggestions to not only take advantage of tax rules but also start saving for your child’s future. Pretty encouraging stuff for hard-working parents and caregivers, isn’t it?  

Of course, you need to meet all the qualifying child requirements to take advantage of these. Be sure to consult your accountant or tax advisor to evaluate your specific situation. If you take the time to get this right, it’ll be a significant tax benefit for you now and could also make a huge difference in your children’s future!

So enjoy your time with your kids! And also, take advantage of the tax deductions for kids and tax credits available to you. It’s a win-win for everyone in the end!

Have you got questions about tax deductions for kids? Leave me a comment, and I’ll do my best to answer them for you! 

Until Next Time,

Love, light, and MONEY, Honey…

Kaylee