by Stacy Francis, CFP®, CDFA
There are tax breaks for parents and children; you just have to constantly keep up with the tax changes. Here are a few ways you can save on taxes.
Take advantage of tax credits – You may be able to claim the $1,000 Child tax credit for each child under 17 by the end of the calendar year. If you adopt, you may be able to take the maximum Adoption credit of $13,190 in 2014 and the employer adoption assistance program income exclusion. But please note that your alternative minimum tax (AMT) liability isn’t reduced by any of these credits.
Give your kids a bonus this year! By giving your children income-producing assets, it can save your family in taxes. For children ages 14 and older, all income – earned and unearned - will be taxed at their own, generally lower, marginal rates. In 2015, you and your spouse together can give up to $14,000 of assets free of federal gift tax to each of your children without using any of your lifetime gift tax exemption. Keep in mind that unearned income beyond $1,600 will be taxed at the parents’ marginal rate for kids under age 14.
A head start for your teenager – Roth IRAs are perfect for teenagers in low tax brackets with many years to let their accounts grow tax free. The contribution limit for minors is the same as for adults under 50: the lesser of $5,500 (in 2015) or 100% of earned income from a legitimate job reported on their tax returns.
Taking over the family business – Hiring your children to work for you has its advantages. If you own a business, you can hire your children and fully deduct their pay. Even more savings can be found if your business is unincorporated and your children are under 18. You will owe no payroll or unemployment taxes on their wages! But don’t worry about cranky kids, your children will benefit too from working for you. They can earn as much as $4,850 and pay zero federal income taxes. But we’re not encouraging child labor here; the children must perform actual work for wages in line with what you would pay non-family employees.
Paying for higher education was never easier than now – Section 529 plans are state-sponsored plans that enable parents to either secure current tuition rates with a prepaid tuition program or create tax-free savings accounts to fund college expenses. Distributions used to pay qualified higher education expenses are income-tax free.
Good news for students with loans – Taxpayers paying interest on student loans may be able to deduct up to $2,500 of interest above the line.The first-60-months limit has been eliminated, and income phaseout ranges are now adjusted annually for inflation.
Check out our other Tax Tips.