I Had Children, and Now I’m Broke… Help...
Don’t you just hate those freeloaders living in your house? Those that just sit around all day complaining that there is nothing to do? The longer they stick around, the more opinionated they get and the more food they consume. You guessed it, we’re talking about kids. Don’t you wish you could just say “Get a job?” but with the 1938 Fair Labor Standards Act, that’s no longer an option.
Kids can be a lot of work and the IRS gets it, so they want to reward you for your efforts. Let's face it, you're helping shape the future of tomorrow. We can help maximize the deductions you deserve and help your family prepare for the future as well.
Have you ever felt like you needed some self-care? Well you should, you deserve it! The IRS thinks so as well and they have two methods that you can take advantage of to take some time off and get some additional tax savings along the way.
The first option is straightforward and easy to meet the requirements. If you have earned income, have a child 13 years or younger, and have dependent care expenses, then you just qualified for a $600 credit. So what is this credit called? Drumroll… Dependent care credit. Although the name is not so creative, it’s a nice perk to include in your tax return.
Let's not beat around the bush, daycare can be very expensive and $600 is not even close to cover your dependent care expenses. Now that you are filing as an S Corp, you can establish a dependent care program. With this program, you can receive up to $5,000 of non-taxable income allocated towards dependent care expenses.
Once you establish the program then you will need to make sure to record the activity through your Gusto account as the non-taxable benefit must be reported through your payroll. The great thing about dependent care is that you can still utilize both the non-taxable income and the $600 credit assuming that your dependent care expenses exceed $8,000.
The criteria to meet the child credit may seem daunting but don’t let the word “test” after each criteria scare you. If you meet all six criteria then depending on your income levels, you may be eligible to receive an additional $2,000 in credits per child. To determine if you qualify for the credit:
- Age test- Is your child 16 years old or younger?
“Yes”, then keep going.
- Relationship test- Is the child legally under your care?
“Yes”, then you are 2 for 2.
- Support test- Do you provide more than 50% of the child’s financial support?
“Yes”, wow you’re on fire!
- Residence test- Did the child live with you for more than half of the year?
“Check”, sweet just a couple more left.
- Dependent test- Are you claiming the child on as a dependent on your tax return?
“Uh, yeah!”, we had to ask and you’re almost finished.
- Citizenship test- Do they have a social security number?
“Of course”, look at that you passed!
Now that you can claim the child tax credit, let’s savor the moment with a fun fact. The citizenship test for dependents was irrelevant until 1987. That’s because until 1987 taxpayers were not required to include their dependents' social security numbers. In 1987, the IRS reported that 7 million children simply ‘vanished’ that year.
529 College Savings Plans
So far we have only touched the tax savings from when your child first opened their eyes to when you are counting the days in sending your kids off to college. It’s never too early to plan for their future and 529 Plans provide a great incentive.
What is a 529 plan? The most common is the education savings plan and the short answer is that it’s an investment vehicle to pay towards future education costs.
Why would you be interested in establishing a 529 plan? Although the contributions are not tax deductible, the account can increase in value like an investment account and you can take distributions to cover qualified higher education expenses tax free.
What are considered qualified higher education expenses? This includes tuition, room and board, mandatory fees, books, and supplies for education towards any college or university.
Can you use the distributions for non-college or university expenses? Yes! You can use up to $10,000 per beneficiary each year to cover tuition at any elementary or secondary (k-12) public, private or religious school.
Are there any limits on how much you can contribute towards a plan? There are no limits but the contributions are considered gifts so if you contribute more than $15,000 to a single beneficiary in a given tax year then you will need to file a gift tax return. Just remember, that’s $15,000 per recipient as many times over as you want, so feel free to help out those nieces, nephews, godchildren, etc.
You will be able to contribute towards your child’s 529 plan until they reach 18 years of age. It is important to note that any distributions in excess of the contributions not used for qualified expenses will be subject to tax plus a 10% penalty.
We know this is a lot to throw at you, and we’re sure you have questions about getting the biggest bang for your buck when it comes to your children. Please don’t hesitate to reach out to your Hyke team to discuss your options!