6 Common Ways Children Impact Your Taxes
Spring is in the air, and the smell of new beginnings is palpable! It’s also a busy time for businesses across all industries, with the arrival of tax season. Most business owners know that effective bookkeeping is often the key to a stress-free tax season. That’s why our tax pros are here with some ways to spring clean your bookkeeping and run your business like the boss we know you are!
1. More Credits
Now that you’re a parent, many aspects of life as you know it is forever changed – including your taxes! Although there are some new complexities, there are also some new tax credits that may be available to you. 2 of the most significant credits are the Child Tax Credit and the Child and Dependent Care Credit. While the Child Tax Credit can directly lower your bill – dollar-for-dollar – for children under the age of 17, the Child and Dependent Care credit is more nuanced. Essentially, if you paid for childcare while you worked, the Child and Dependent Care credit could cover up to 35% of the first $3,000 you paid for that childcare. However, this credit is available for the care of children up to 13.
2. New Deductions
With a baby on board, there are some new deductions you may be able to utilize to help you save on your taxes! While you may not even have the bandwidth to think beyond tomorrow, much less years from now, it’s a good idea to start thinking about using a student loan interest deduction down the road. If your child is college-bound, you may be able to deduct paid interest from qualifying student loans, thereby lowering your taxable income! Another deduction to consider is the Health Insurance Deduction for Children of Self-Employed Individuals. If you’re self-employed, you can generally deduct 100% of health insurance premiums paid for children up to the age of 27!
3. Updated Filing Status
As you already know, the filing status you choose has a major impact on your tax bill. Especially if you are a single or divorced parent, filing as the Head of Household is one of the smartest things you can do! Generally, a Head of Household filing status allows you a higher standard deduction, while reducing your taxable income. If you’re married and filing jointly, you and your spouse will claim your child a dependent on the tax return you complete together.
4. Additional Withholdings
Another perk of parenthood is your ability to claim more withholdings on your W-4 form! Simply put, your W-4 is the form that helps your employer determine how much federal income tax to withhold from your paycheck. Now that you have a child, you can take more allowances on your W-4. If you recently had a child, now may be a great time to update your W-4, so you can take more of your paycheck home. (As long as what you’ll owe in taxes isn’t too high!)
5. Fresh Investment Opportunities
With more than your own future to think about now, securing some financial stability for your child is at the forefront of your mind. Luckily, there are some new investment vehicles for you to explore! If you have significant income and assets, a 529 Savings Plan may be worth your while. It’s more than investing in your child’s education – a 529 Savings Plan can help reduce your state income tax. In fact, many states offer tax breaks to parents who contribute to their child’s 529 Savings Plan.
6. Trickier Tax Planning
For all the joys parenthood brings, there are just as many new complexities and avenues to explore when it comes to your taxes. The trickier your tax planning becomes, the easier it can be to miss out on opportunities to save and maximize your hard-earned money! From reducing your tax bill to investing and saving, the right tax planning strategy will help you reach your goals. That’s why it may be the right time to rely on more than TurboTax and hire an experienced advisor to help!
Children Impact Your Taxes
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Becoming a parent is one of the sweetest chapters in life we can experience. At Lifetime Tax, our advisors tackle the tax planning that comes with parenthood, so you can get back to enjoying every moment! If you’re ready to work with tax advisors who can build a strategy that will grow with your family, give us a call at (972) 771-6707 or visit our website!
Tax Planning That Grows With Your Family
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