Parent's know that the expenses associated with raising a child quickly add up. By the time a child is 18, parents can expect to spend anywhere from $145,500 to $455,000, a range that doesn't include the cost of college. Get ahead of your expenses by utilizing some of the tax benefits specifically designed for parents.
Contribute to a Tax Advantaged 529 College Savings Account
One of the most significant expenditures a parent will have is college tuition. A 529 college savings plan helps parents save for this huge expense. Though parents do not get a tax break on the contributions themselves, they do not have to pay taxes on the earnings, as long as the earnings are used for qualified educational expenses.
This means that a 529 plan can possibly offer decades of tax free growth for your college savings. Other savings vehicles require that you pay taxes on the earnings (such as taxable investing accounts).
Some states do offer tax payers a tax deduction or credit for 529 contributions, permitting tax payers to decrease their state income tax obligation.
Reduce the Cost of Your Childcare Expenses
Childcare expenses is another significant cost that parents face. There are a few ways that parents can use the cost of daycare to save on their taxes.
Some parents have access to a dependent care flexible spending account (FSA). A dependent care FSA may be offered by the parent's employer. The dependent care FSA lets parents set aside pretax contributions that they can use to help pay for daycare, after school care, and summer child care. Parents do not pay income taxes on the money that they contribute to the FSA.
Parents can contribute up to $5,000 a year to their FSA. The contributions must be used for child care in the same plan year that you contribute the funds.
If your employer does not offer an FSA, you can still save money on your child's daycare expenses by claiming the child and dependent care credit. The amount of the credit you are qualified to take varies based on your income and the number of children you are claiming the credit for.
To take the child and dependent care credit, you must pay someone other than the child's parent to care for their child. The childcare provider or daycare must report the income on their taxes for you to be eligible to claim the credit. It is a requirement that you use the childcare to either work or look for employment.