As parents, we have the magical ability to make a game out of any miserable chore. In the game “Taxes,” the goal is to hunt for credits and deductions that will let you keep the money that belongs to your family. Here are your first ten moves. – Heather Cassell
1. Take your Child Tax Credit.
Children aren’t just cute. They’re also deductible. The child tax credit allows parents to deduct $1,000 from their tax return for each child. The child tax credit can be used in conjunction with the child and dependent care credit that help parents with childcare expenses for children under the age of thirteen or a disabled spouse or child. This could add up to thirty-five percent of your qualifying expenses, depending upon your income. For 2007, this could be up to $3,000 of the expenses your family paid out to a caretaker for the child(ren) or qualified adult(s) being cared for. And adoptive parents might be eligible for an adoption credit up to $11,390 in 2008 for qualifying expenses.
2. Look into housing credits.
This past year has been rough on homeowners. To stop the mortgage hemorrhage, President Bush signed the Mortgage Forgiveness Relief Act in December 2007. The upshot: Homeowners won’t have to pay taxes on debt forgiveness (the usually taxable portion of your mortgage forgiven by a bank or lender when the value of your house declines) for qualified debt forgiven in 2007, 2008 or 2009. There is no financial limit to the Mortgage Forgiveness Relief Act if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven.
To claim your relief, check to see if your lender sent you a Form 1099-C (Cancellation of Debt). Homeowners should have received this form from lenders by January 31. Form 1099-C will show the amount of debt forgiven or cancelled to claim. Tax programs may not have the information due to the law’s late passage. To claim the amount of debt forgiven or cancelled download and print out Form 982 from the IRS website and attach it to your tax return. If for whatever reason you don’t qualify for debt forgiveness, don’t lose hope. Check into the “insolvency” exclusion. For more details, see the White House’s release or the IRS’s website.
3. See if you qualify for an Earned Income Credit.
According to Marjory Chelsea, a tax preparer in Salt Lake City, Utah, employees can get an advanced earned income credit through some employers, meaning they can have a little extra each paycheck rather than waiting until the end of the year to receive the lump sum in a refund. “My opinion is, ‘Why are you letting the government hold your money for you interest-free for a year when you could be using it?'” said Chelsea, who doesn’t believe families need to be “scratching all year round” for money that they need.
The earned income credit is especially important for working single mothers, according to NATP member Louise Gritmon, EA, of Medford, New York. “She can still file as head of household and take the EITC,” said Gritmon, “which will give her a much better refund than filing as a single with no dependents.”
Also, now is a good time to adjust your exemptions for 2008. It’s better to have a little more money each month than to get that big refund at the end of the year.
The IRS has a handy online assistant that comes in English and Spanish to help you figure out if you qualify for the Earned Income Credit.
4. Get that increased personal exemption.
Individuals are worth a bit more this year in Uncle Sam’s eyes. Personal exemptions increased this year to $3,400, which means that if you’re in the fifteen-percent tax bracket, you’ll save $510 for each personal exemption claimed, and if you are in the twenty-five percent tax bracket it will save you $850.
5. Invest your rebate.
Congress approved the economic stimulus package last year, which grants $600 to individuals and $1,200 for couples, plus $300 for each child under the age of seventeen. But that refund will be taxed in 2009, Chelsea said, just like refunds are taxable under the tax code because it’s considered income.
The best way to avoid paying taxes on that rebate and any refund, according to Chelsea, is to put that money into a retirement account, which individuals can do until April 15th for 2008, if they haven’t contributed the $15,500 maximum to their retirement.
6. Bunch deductions.
To maximize the value of itemized deductions, the NATP suggest there might be some savings by managing purchases and donations into a single year rather than spreading out these expenditures over two years. Payments for medical expenses, property taxes, and donations to nonprofit organizations are a few items that can be bunched together, but some itemized deductions depend on meeting certain thresholds in order to be claimed.
7. Take healthcare deductions.
Families can take deductions for: insurance premiums, uninsured medical expenses, treatments not covered by insurance, travel for medical care, medically necessary equipment, and more. This year a new health coverage tax credit was added to assist individuals who lost their jobs due to international trade. The new tax credit can pay up to two-thirds of health plan premiums that meet certain criteria. Employer flexible spending accounts are an additional way to reduce taxes.
8. Start a retirement account, or research a new one.
The retirement savings industry is changing. Make sure your current plan is still a good deal. If you don’t have a retirement plan, it’s never too late to start one, even if it’s just a few dollars a paycheck. The IRS continues to increase the amount individuals can contribute to their retirement plans, which are tax deferrable.
9. Save for your kid’s education.
While retirement is one of the biggest savings goals for individuals and families, paying for good education for your kids is near the top of the list. To save for your kid’s education, right now the best plan and the only long term tax-deferrable plan available is the Section 529 savings plan. Parents can contribute up to $2,000 a year tax-free toward each kid’s education.
10. Beware the “kiddie tax.”
The “biggest tax trap for parents,” according to Cindy Hockenberry, a tax information analyst of the National Association of Tax Professionals, is the “kiddie tax.” Back in the day, parents were able to transfer stocks and other appreciated assets to their children, who had no income or paid lower taxes. Through the years, the loophole has been closed and in May 2007 the rules were extended to include children between the ages of nineteen and twenty-three. This closed parents’ window of opportunity to reduce taxes by using their children. The problem: Now college-age children will be responsible for paying for a higher tax in 2009. Kiddie taxes also include income earned by teens, between $900 and $9,000 in 2008. But it’s still worth getting them to mow the lawn.
Obviously, this is just a list of suggestions culled from accountants who seemed smart to us. We’re just humble writers and editors, so don’t sue us if you still owe a bunch of money! Good luck!
Article photo: Christine and Jeff Estilo