(ALL THE MOMS) -- Kids can put a hurt on the checking account, that’s for sure.
But here comes income-tax season: the time of year when kids, both small and college-age, can actually put money back into your account. Moms and dads need only take advantage of Uncle Sam’s tax credit and deductions. The result could pay off by trimming that tax bill by thousands of dollars.
Sandy Abalos, the principal in charge of the REDW Phoenix office, a financial services firm, identified five of the most often missed tax breaks for families:
“While families are generally aware of the more common tax breaks, such as dependent exemptions, child tax credits, filing status and deductions, these (other benefits) often fly under the radar leaving hard-earned money on the table.”
TAX DEDUCTIONS OFTEN MISSED
1. STUDENT LOAN INTEREST
In the past, if parents paid back a student loan, no one got a tax break. To get a deduction, the law said that you had to be both liable for the debt and actually pay it yourself.
But now there’s an exception. If the parents pay back the loan, the IRS treats it as though they gave the money to their child, who then paid the debt. So a child who’s not claimed as a dependent may qualify to deduct up to $2,500 of student loan interest paid by mom and dad.
2. QUALIFIED TUITION PROGRAM – 529 PLANS
Contributions to 529 plans are not deductible for federal tax purposes, but most states offer deductions or some form of credit made for contributions to a 529. Arizona, for example, allows a deduction up to $2,000 for a single individual or $4,000 for a married couple.
TAX CREDITS OFTEN MISSED
Abalos says parents definitely do not want to miss a credit: “A tax credit is so much better than a tax deduction — it reduces your tax bill dollar for dollar. So missing one is even more painful than missing a deduction that simply reduces the amount of income subject to tax.”
3. AMERICAN OPPORTUNITY EDUCATION CREDIT
This credit is up to $2,500 per student for payment of qualified education expenses (which includes tuition and fees, books, supplies and equipment) for a taxpayer, spouse, or dependent.
The student must be enrolled at least half-time in a degree program. Parents can shift the credit to student by not claiming the student as a dependent. The credit is for the first four years of undergraduate.
4. CHILD CARE CREDIT
It is easy to overlook the child and dependent care credit if you pay your child care bills through a reimbursement account at work. Until a few years ago, the child care credit applied to no more than $4,800 of qualifying expenses ($2,400 per child maximum of two). The law allows you to run up to $5,000 of such expenses through a tax-favored reimbursement account at work.
Now, up to $6,000 can qualify for the credit ($3,000 per child maximum of two), but the old $5,000 limit still applies to reimbursement accounts. So if you run the maximum $5,000 through a plan at work but spend more for work-related child care, you can claim the credit on up to an extra $1,000. That would reduce your tax bill by at least $200.
5. ‘SINGLE’? OR ‘HEAD OF HOUSEHOLD'?
This can be a tricky one for parents who are divorced or unmarried and have children. They are single. And they are head of household, right?
But the box moms and dads check can lead to a bigger tax bill, Abalos said.
Filers want to check head of household if they qualify, she said.
A taxpayer is eligible for head of household filing status if they meet the following:
- is unmarried at the end of the year
- paid more than half the cost of keeping up their home
- the home was the principal residence for more than half the year of taxpayer’s qualifying child
- taxpayer is a U.S. citizen or resident during the entire year