Taxes can be stressful. The last thing you want to do is send more of your hard-earned money to the government. Fortunately, various tax reduction techniques are available to help families with children lower your taxable liability.
Consider some of the six strategies listed below if you want to reduce your children’s taxes.
1. Business owners should consider employing your children.
By hiring your kids, you can save your federal taxes by up to 37%, and you’ll also get an extra set of helping hands. Regardless of the child’s age, if they make the standard deduction of $12,950 or less, federal income tax is not due on their salary. However, depending on the state’s threshold, the child might be required to pay state income tax. If the child receives any additional income in addition to what they make from working for your client, it may be taxed if it causes them to exceed the standard deduction limit. Keep in mind that hours worked and remuneration must be appropriate for the position. What’s more, if you own a sole proprietorship, a limited partnership, or a partnership between parents, and the child is under the age of 18, Medicare and Social Security taxes won’t be due.
2. Your kids should invest in Roth IRA.
Your children should contribute to a Roth IRA (Individual Retirement Account), regardless of whether they work for you or find a summer job. Because retirement withdrawals are tax-free and money can grow tax-free, this is a great chance to teach kids how to save their money. Although there is no tax benefit in the year of contribution, it is quite advantageous not to have to pay taxes in the future as the account balance increases. In 2022, Roth IRA contributions from individuals under 50 are capped at $6,000 annually.
3. If your kids get college jobs, they will be exempt from FICA.
The Federal Insurance Contributions Act (FICA) is a United States federal payroll contribution directed towards both employees and employers to fund Social Security and Medicare.
FICA taxes amount to 7.65% in total, and if your child gets a college job, they may be able to make money without contributing to Medicare and Social Security. The FICA tax does not apply to some services provided at the college where the child is enrolled. If your child is interested in working throughout their time in college, suggest that they should seek employment in that college in order to save $7.65 on every $100 they make potentially.
4. Take advantage of the Dependent Care Tax Credit.
Have you ever paid for or are now paying for summer camp or other child care for a child under the age of 13? A dependent care tax credit may be claimed at the state, and federal levels provided the child meets the eligibility requirements.
For before-school programs, after-school programs, day camp, daycare, and preschool, you can deduct up to $1,050 for a single child or $2,100 for several children. For federal taxes, unless the adjusted gross income exceeds a specific limit, tax credits are available up to 35% of tuition costs with a limitation of $3,000 for a single child and $6,000 for multiple children. Don’t forget to check your individual state laws that might offer additional deductions and savings.
5. Consider opening a College savings 529 plan.
Starting a college savings plan is a great idea, and parents who haven’t started saving yet can open a Savings 529 plan. Contributions could be tax deductible at the state level, although they are not at the federal level. But if you utilize the money to pay for tuition or other educational costs, the growth is completely tax-free.
6. Take advantage of tuition and college credits.
Every year, college tuition prices climb, but you can reduce these costs by utilizing one of the following credits.
American Opportunity Tax Credit or AOTC
The AOTC offers a yearly credit of up to $2,500 per eligible student for qualified education-related expenses paid in your first four years of higher education. A refund of up to $1,000 can be given for 40% of the remaining credit if it reduces your taxes to zero. For each student, the credit is worth 100% of the first $2,000 in eligible educational expenses and 25% of the following $2,000 in eligible expenses.
Lifetime Learning Credit or LLC
The LLC is for students enrolled in a qualified educational institution’s qualified tuition and other relevant costs. You may use the credit to pay for the cost of undergraduate, graduate, and professional degree programs, as well as programs that can help them develop or gain work skills. You can claim it in any qualifying year, and the maximum value of the credit is $2000. Each year, families are limited to one tax credit claim, so you should take into account the advantages and disadvantages of each to choose the most advantageous course.
Get out of debt through debt restructuring with the money you save on taxes
Your tax savings can be put to a variety of uses. Think of them as accumulated savings rather than extra money to spend. To improve your overall financial health, consider using the funds to pay off any debt. Especially for small business owners, restructuring your debt could be an excellent option. A business facing financial challenges may be able to continue operating by restructuring its debt.