Having a child is one of life’s greatest joys – paying your taxes is not. While paying taxes is an inevitable fact of life, having a child can provide a little relief in that department. This happens in two ways – by exempting some of your income from tax and by giving you credits to reduce the amount of money you owe the government. Let’s explore the details.
First let’s talk about the exemption. Claiming a child will exempt $3,950 of your income from tax. This equates to about $990 if you’re in the 25% bracket. You can do this as long as the child is under age 19 at the end of the year. You can continue to claim an exemption deduction for your child who is a student and under the age of 24 at the end of the year. The exemption amount is per child, but it is phased out for higher income taxpayers, beginning at $305,050 for joint returns and $254,200 for single filers.
Now for the money straight off the top – the Child Tax Credit will take $1,000 off the amount you owe to Uncle Sam for each child under the age of 17. However, this credit is phased out for higher income taxpayers, starting at $110,000 for joint returns and $75,000 for single and head of household returns. In President Obama’s recent State of the Union address, he proposed raising this credit to $3,000 for parents with children under the age of 5.
If your child was born at the end of 2014 – you’re still in luck! Both of these scenarios will count towards the entire year, regardless of the child’s birth date.
Another way working parents can get a tax break is to participate in a dependent care Flexible Spending Account (FSA), which is frequently offered by employers. These accounts allow you to set aside pre-tax dollars to pay for dependent care for children under the age of 13. The maximum contribution to a dependent care FSA is $5,000 ($2,500 for a married individual filing separately) If you are married, your spouse must be working, looking for work or be a full-time student in order for your household to qualify for a dependent care FSA. You can save $1,250 in taxes a year if you are in the 25% tax bracket and contribute the maximum amount to a dependent care FSA.
We all know how much time and money is spent at the doctor’s office while children are growing. Fortunately, many employers offer a health FSA, which can result in additional tax savings for working parents. The maximum contribution to a health FSA per year is $2,500. However, for a married couple, each person may contribute up to this maximum. An employee in the 25% income tax bracket could save $625 in taxes by setting aside $2,500 into an FSA. . One downfall of FSAs is that you lose the money if you don’t use it, but companies can provide for an optional grace period, which allows employees to incur expenses up to March 15th following the end of a calendar year plan. Alternatively, a recent change in the law allows companies to give employees a little break on this by allowing a $500 carryover to the next plan year.
The figures above are for the 2014 tax year and may not apply to your specific situation. Please contact us if you aren’t already taking advantage of these options. It’s worth a discussion!
Steph serves on the Junior Achievement of Kansas Board of Directors in Topeka. This article was written as part of a series published to promote the organization and its mission to teach financial literacy, entrepreneurship and work readiness to young people.