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The Eagle • theeagle.com
Sunday, March 2, 2014
Life Financial Planning Thank you to the Brazos Valley Chapter, Texas Society of Certified Public Accountants for providing the written content for this special advertising feature in The Eagle.
The benefits of a child - tax benefits, that is
Jodi Jones, CPA The title of this article might conjure up many amazing, yet challenging thoughts and feelings. Before the mind wanders too far, let’s hone in on the word TAX. This article will focus on several tax issues, including deductions, credits and financial planning. As most of you know, welcoming a child into your life grants you an automatic tax deduction. This begins as a set amount that each year is indexed for inflation. In 2013 and 2014, the personal exemption amounts are $3,900 and $3,950, respectively. Returning to tax law in 2013 is the concept that you may not receive the full deduction, depending upon your level of income. If you are married filing jointly, when adjusted gross income (AGI) reaches $300,000, a phase-out will begin to occur, and the deduction completely disappears when AGI reaches $422,500. The limits are different based upon your filing status: Single phase-out range is $250,000 to $372,500 and Head of Household is $275,000 to $397,500. In addition to the
personal exemption, you may be entitled to claim a child tax credit of up to $1,000 per qualifying child. Some of you just noticed the words “may” and “qualifying” in the previous sentence. No article about taxes can state absolute rules but rather general rules with exceptions. Generally, the child tax credit is a nonrefundable credit that is limited to regular tax, plus alternative minimum tax. One exception is that for certain taxpayers, some of the credit may be refundable. Another exception is that beginning at $110,000 AGI, the child tax credit begins to phase out if you are married filing jointly. [Single and Head of Household - $75,000]. The law does keep the definition of a qualifying child similar for the purposes of this credit to a dependent, except for the age limitation of less than 17. If your bundle of joy arrived through the adoption process, certain expenses incurred in the legal adoption of the child may be eligible for an adoption credit and/or you may be able to exclude adoption benefits provided by your employer from income. Factors that may affect the ability to utilize this credit include the age of the child, whether the child is determined to have special needs and your level of income. Qualified adoption expenses include, but are not limited to, adoption fees, attorney’s fees,
court costs and travel expenses. Additional issues often arise with foreign adoptions or unsuccessful adoptions. Always consult your tax advisor to discuss the particulars of your facts and circumstances, so you gain a full understanding of required documentation and benefits available. Many tax items have been addressed thus far that begin upon arrival, but let’s progress with the child’s age and needs. If you incur expenses for the care of your child, thereby enabling you to work, the child and dependent care credit may be available. This includes care expenses for children under the age of 13 or an incapacitated child while you work or perhaps look for work. Like many other credits, this one is nonrefundable and is limited to 20 to 35 percent of qualifying expenses and depends upon your level of income. Eligibility tests, qualifying individual tests, qualifying expenses, maximum expenses allowed per child and family, earned income of taxpayer and spouse, full disclosure of caregiver, address and federal identification number, along with dependent care benefit plans offered through your employer add complexity in determining your ability to claim this credit. With all the expenses that a child brings to the parents’ life, it may
Did you know? According to Age in Place, nearly 60 percent of available senior income is being spent on housing and healthcare, and those expenditures do not include transportation or food. The rising costs of many necessities can make it difficult for seniors to make ends meet and, as a result, certain money-saving measures are often necessary. One idea to save money is to shop for food on a full stomach. It’s a fact that people buy less when they’re full, as they are not prone to impulse buys to squash hunger pangs.
be hard to think about saving. This next topic is from a financial planning angle, and may include other family members, including grandparents. Qualified Tuition Programs, commonly referred to as 529 plans, are tools to either prepay a child’s tuition for a qualified higher education institution or at least contribute to an account used to defray the cost of paying for the child’s education at a qualified higher education institution. Grandparents can use this tool to gift a large upfront amount to their grandchild’s account. No tax deduction is available upon contribution; however, the impact is family asset transfer and the potential for the fund’s earnings to avoid taxation entirely if spent on qualified higher education expenses. As mentioned previously in this article, a taxpayer’s adjusted gross income often comes into play to determine the ability to utilize a tax benefit. This is one area that does not tie into the adjusted gross income. The Internet provides many resources and comparison tools, and if you are interested in learning more, begin your search at www. savingforcollege.com. Another financial planning tool is the ability to teach your child the importance of saving. This can begin early in life and many possibilities and strategies exist. Let’s focus on just one in this
article. As your child begins to have earned income, encourage them to open an IRA account. Depending upon their level of income, the ROTH IRA may be the optimum savings device. A Roth IRA does not provide a deduction as contributions are made (and often children do not need the deduction on their tax return), rather they provide the ability for the earnings to grow and not be subject to taxation, even on the withdrawal of those funds. Tax strategies may involve a parent employing their child in the family business or a grandparent gifting some of the Roth IRA contribution. Do not underestimate the earning potential from numerous years of investment growth during the child’s life. Briefly we need to mention a lesser-known tax referred to as the kiddie tax. In financial planning for families, asset transfer plans are utilized to shift earnings to realize lower effective tax rates. This should be done in consultation with your CPA and financial planner to avoid pitfalls. The kiddie tax is one such pitfall. A child’s unearned income (interest, dividends, capital gains, etc.) may become subject to the parent’s tax rate, and as such, negate benefits of the asset transfer. There are certain investments that do minimize the effect of the kiddie tax, and careful planning is needed.
The last topic this article will cover is qualified higher education deductions and credits. Currently, these include the tuition and fees deduction, the American Opportunity credit and the Lifetime Learning credit. There is a difference between a deduction and credit. A deduction is given above the adjusted gross income line of your return, while the credits reduce the actual tax liability. Careful consideration should be given to determine the best overall result for your situation. The American Opportunity credit is available only on the first four years of your undergraduate degree, while the Lifetime Learning credit is available for undergraduate and graduate studies. Rules and limitations include adjusted gross income, expenses falling under the definition of qualified education expenses and enrollment. This article covered considerable territory, but each concept has several layers to determine the deductibility and best tax minimization planning. Your CPA can help you understand and work with you to develop a plan. Jodi G. Jones is a CPA and tax partner with Seidel, Schroeder & Company in College Station. She can be reached at 979-846-8980 or www.ssccpa.com.
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