Being able to watch your children grow up is full of twists and turns, and things can get even more fun as they become more independent and start taking on new responsibilities. Along the way, though, the journey of parenthood also requires us to do some careful planning ourselves. The financial implications can get pretty tricky!
When kids are younger, the tax breaks can be a nice kickback. But as they get older, tax prep can get even more complicated. Taking a proactive approach to tax planning is key.
Growing Pains: Tax Adjustments as Your Kids Age
As if parenthood and taxes weren’t already tough enough, the dynamic between the two is also challenging to handle. In order to maximize your tax benefits, you need to stay informed of the tax laws and regulations. Then you’ll be able to adapt to those shifting eligibility criteria and avoid the surprise of a lost deduction come tax time.
For example, when your child reaches the age of 13, you’ll be losing access to the Dependent Day Care Credit. That typical minimum annual credit is $600 for one child, and both you and your spouse need to be working during that time to be eligible for the credit. If you have two or more children, then the credit would be $1,200 (if your adjusted gross income is over $43,000).
The next major adjustment to your taxes will happen when your child turns 17. This is when the Child Tax Credit (CTC) goes away. The CTC provides taxpayers with a $2,000 credit (with $1,600 of that being refundable) per child until age 17.
When a child reaches the age of 19, your family’s tax situation may undergo another significant change. The good news is that this is when the kiddie tax no longer applies. This means that any unearned income for the child (like interest or dividends) that goes over the annual threshold won’t need to be taxed at the parent’s rate anymore. And since the parent’s rate is usually higher, the child should be able to keep more money in their accounts.
In 2023 the annual threshold for the kiddie tax is $2,300. One exception to this is for kids enrolled as students. In which case, they would still be subject to the kiddie tax until age 24. There are a lot of nuances to the tax code, but when you have a good tax advisor on your side, you can figure out a solid plan for your own situation.
Ways to Replace Those Lost Tax Breaks
As children grow older, some parents will hire them to work at the family business. This can be a great tax move because your child’s wages may be subject to little or no income tax, and they might even qualify for an exemption from withholding taxes.
Another tactical tax move is to claim your $500 credit for dependents who don’t qualify for the CTC. This credit is nonrefundable and will usually only be applicable to high school seniors and college students. But it’s still worth considering!
Get Ahead with Strategic Tax Planning
Tax laws are always subject to change, so it’s important to revisit your strategy every year, at minimum, to make sure you’re being as strategic as possible with your tax planning. The steps you take now can help you keep more money in your pocket. Scheduling a tax planning session can help you reduce your tax obligation for both this tax year, and the next.