Yes, there are many tax breaks available to families, and at PFBF CPAs, we know that planning ahead can save taxes and teach children the value of earning and saving money. Whether you find yourself balancing caring for aging parents and funding your children’s educations, or you just want to have a plan in place so you’re not surprised at tax time, we can guide you with your needs in mind.
In addition to the child tax credits that reduce your tax bill dollar-for-dollar, there are other tax-advantaged savings opportunities.
Dependent Care FSA
You can redirect up to $5,000 of pretax income to an employer-sponsored child and dependent care Flexible Spending Account, saving you income and employment taxes in the process. The plan then pays or reimburses you for child and dependent care expenses. You can’t claim a tax credit for expenses reimbursed through an FSA.
Roth IRAs for Teens
Because teenagers are likely to have many years to let their accounts grow tax free, Roth IRAs can be perfect for teenagers. The 2013 contribution limit is the lesser of $5,500 or 100% of earned income, reduced by any traditional IRA contributions. Contributions aren’t deductible, but if the child earns no more than the standard deduction for singles ($6,100 for 2013) and has no unearned income, he or she will pay zero federal income tax anyway. If a child’s earned income exceeds the standard deduction, the income likely will be taxed at only 10% or 15%.
Coverdell Education Savings Accounts (ESAs) and 529 savings plans offer parents (or anyone else, such as grandparents) a tax-smart way to fund education expenses. You remain in control of the account even after the child is of legal age, and you can make rollovers to another qualifying family member. Contributions aren’t deductible for federal purposes, but plan assets grow tax-deferred. Any distributions you take and use for qualified expenses are income-tax-free for federal purposes and may be tax-free for state purposes too.
So, which plan is better all depends on your situation. Give us a call if you want to talk about the best plan for your family. We can advise you on jumpstarting a 529 plan, make sure you are getting the education credits if your kid is already in college, or we can discuss other ways to plan for your family’s future.
Sarah Wadick, Accountant