It's that time of year again! Back to school time is already here and I thought it would be a good time to go over some of the deductions and credits that Uncle Sam offers for our school aged children.
Birth through Age 13
The Child & Dependent Care Credit
The Child and Dependent Care Credit is a federal tax credit that helps you pay for child care or other dependent care. To qualify, your child must be 13 or younger, if married, you and your spouse must file jointly and both be working, looking for work or attending school full-time.
The amount of your credit depends on a couple of factors... How many children you have and how much money you make. If you have one child, you can claim up to $3,000. For two or more, the amount is $6,000 of the qualified child care expenses paid during the year. Depending on your income, you can deduct 20%-35% of your qualifying child care expenses with the lowest deduction being 20% for "high income earners" (over 43k a year).
Kindergarten through High School
Coverdell Education Savings Account (ESA)
An ESA is a tax-deferred savings account with earning and withdrawals free from federal income tax if used for qualified education purposes. You can pay for your child's education expenses for those in kindergarten through 12th grade, college or trade school - and it doesn't matter if your child attends a public, private or parochial school. Eligible expenses include tuition and fees as well as books, supplies, and equipment. Expenses also may include academic tutoring; special needs services; room and board; uniforms; and transportation. You can contribute up to $2,000 after taxes and earnings grow federal income tax free and assuming that you follow the rules, funds which are withdrawn and used for qualifying education expenses won't cost you a penny in federal income tax.
Sew Now, Reap the Rewards Later
IRS 529 Plan (In Texas AKA, Texas College Savings Plan)
An IRS 529 plan is a state-sponsored investment plan that receives special tax benefits. 529 plans are designed to help families-regardless of income level-save for college expenses, such as tuition, books, and room and board. Investments grow tax deferred, and qualified withdrawals are federal income tax free. Contributions to these plans are after-tax, anyone can contribute to the plan, and there are no annual contribution limits - however, the account balance cannot exceed $370,000.
If you'd like some more information on these programs, please do not hesitate to call us. Hopefully, you will be able to use some of these strategies to help offset some of the costs of raising children, after all, every penny counts! Browse our website for more on our CPA firm Houston.
Next week, we will go over all credits and deductions for those who have children in college (or are in college themselves) and those who have work-related education expenses.