By Jessica Sommerfield
Believe it or not, having a kid means you can get money back from the IRS. Yup, that means tax breaks that put money back in your pocket! These pre-tax expense accounts, tax deductions, and tax-deferred savings options will give you the financial break you deserve.
1. Dependent Care FSAs
Childcare is a huge expense when both parents work. Many employers now offer a flexible spending account (FSA), known as a Dependent Care FSA, to help reduce childcare costs. Participants are allowed to set aside pre-taxed income for dependent care expenses. Your savings is based on how much federal taxes you pay. Most people pay 15-25% a year in federal taxes. By paying for daycare with “pre-tax income” you save 15-25% in daycare costs! The following expenses qualify:
- Summer day camp
- Fees paid to a nanny placement agency
- Before/after school care programs
- Pay for relatives (over age 19) who care for your children
- Pay to a housekeeper whose duties also include child care
What doesn’t qualify? Activity fees (sorry, karate class) or a babysitter who only takes cash. Receipts are required so think twice about using a sitter that only wants to be paid off the books. Although the minimum and maximum amounts you can contribute are set by your employer, they can’t exceed $5,000. If you’re married but file your taxes separately, each of you can set aside up to $2,500.
These FSAs only allow you to file claims that can be covered by the amount currently in your account. For instance, if you have a large claim early in the plan year that exceeds your balance, you’ll have to wait to file it. Still, being able to use pre-tax dollars for childcare gives you a significant savings. For more specific information about your employer’s Dependent Care FSA program, ask your Human Resources (HR) department.
2. Health Care FSAs
Braces, eyeglasses, allergy shots are all expensive. Did you know you could pay for all of these expenses and more tax-free? Health Care FSAs allow you to set aside pre-tax income for out-of-pocket medical expenses not covered by insurance, including those for your kids. Using Health Care FSAs also lowers your taxable income (which benefits you when it’ time to file your tax return).
Eligible expenses for you and your dependent children can include the following:
- Prescription medications, bandages (and some over the counter meds, with restrictions)
- Insurance co-pays
- Dental and vision treatments (braces, glasses, contacts, etc.)
- Maternity costs and materials (breast pump supplies, birthing classes, etc.)
- Baby formula specific to a medical condition
- Items needed for allergy relief (as prescribed by a doctor), such as humidifiers, vaporizers, sprays, special vacuums, pillows, etc.
- Diapers for disabled, non-infant children with medical conditions
- Special education programs prescribed by a doctor
The current maximum contribution for health care FSAs is $2,550 per spouse. Funds have to be used before the end of the plan year. Recently many employers are giving a two-month grace period for employees to rollover up to $500 for the following year.
Ask your Human Resources department for more specific information about your employer’s Health Care FSA program. For a detailed list of eligible expenses for both Dependent Care FSA and Health Care FSAs, go here.
3. Child and Dependent Care Tax Credit
The IRS allows you to claim up to $3,000 in tax credits for one child, and $6,000 for two or more children towards expenses related to child care. This is a great option if your job does not offer Dependant Care FSAs. Even if you are already taking advantage of them, you can still claim the Child and Dependent Care Tax Credit for expenses that exceed the $5,000 in expenses claimed in the Dependent Care FSA. For more information on the specific qualifications and eligible child care expenses, refer to tax form 2441 on the IRS’s website Topic 602.
4. Tax-Deferred Savings for Children
There are ways to save more for your children’s college fund too. College is expensive so every penny saved counts. The best options include:
529 College Savings Accounts – Similar to a 401k plan for retirement, these accounts allow you to put pre-tax income into an account for college expenses. You decide how to invest to grow the money. Since the money deposited is pre-tax, you are saving more money for your kids college education. The additional benefit is the 529 College Savings Account can be used towards any college tuition expense.
Pre-Paid (529) Tuition Plans – Instead of being vulnerable to the whims of investing in the stock market, you pre-pay your kid’s college tuition. Since college tuition costs have increased 1,120% in the last 30 years, pre-paying seems like a great strategy! The downside of pre-paid plans is that they are limited to participating schools. Some programs only allow your kids to attend schools in-state, but Private College 529 has participating schools across over 35 states and includes a diverse list of colleges including Stanford and MIT.
Jessica Sommerfield is a freelance writing student who enjoys taking in the beauty of the Pacific Northwest and living simply. She’s especially enthusiastic about running, fitness, and finding new ways to eat healthy on a budget. Follow her on Twitter: @JessicaLSommer