Tax time. If you’re like many Americans, you want to rush through them, or outsource them and be done. That is, until next year.
But rushing through your taxes or failing to plan can mean costly mistakes, added hassle, or tax breaks left on the table.
For parents with kids at home or in college, there are provisions in the tax code just for you that can add up to significant savings.
Before you turn in those tax forms, double check the following:
Is your name spelled right? Is your address correct? Do you have accurate and complete Social Security numbers for you and your kids. These are common mistakes. I’m not kidding. Last fall, the IRS was sitting on $153 million in undeliverable refunds because the agency couldn’t locate taxpayers.
Have you entered the 21st century? E-filing your taxes and setting up direct deposit for your refund is the fastest, least-error-prone way to get your taxes off your plate and your money in your hands. Free e-filing is available for some taxpayers. Free fillable forms are available for everyone. Learn more at freefile.irs.gov. Even if you pay for online tax prep, it’s not expensive. I use TaxAct and am charged less than $50 to prepare and file both Federal and state returns. Better than slaving away with paper forms and a calculator.
Any big life events? Significant life changes — getting married, moving, sending a child to college — alter tax circumstances. Kiplingers.com has a good series on tax planning by life event. Following are some of the key kid-related tax benefits.
New addition to the family? Each child under 17 qualifies for the $1,000 child tax credit. That phases out at higher tax brackets, but is a welcome benefit for families who earn less. Parents who adopt qualify for an adoption credit of nearly $14,000 per child. It also has a phase-out for higher incomes. Check out “Tax Topic 607” for the skinny.
Kids in daycare? If you require daycare, there is a little help. You can contribute to a pre-tax flexible spending dependent care account or take the dependent care credit on your taxes. Actually, you can do both, so long as you don’t “double dip,” or take advantage of both programs with the same dollars. Since childcare is so pricey, my family has always used both to make the bite less painful. Remember summer camps and other activities that provide childcare while you work qualify as dependent care. Minnesota has its own special tax breaks for education-related camps. Some school supplies too. Check out Revenue.state.mn.us they will the details.
Kids in college? For your college student, there are several tax benefits worth up to a few thousand dollars. Unfortunately, deciding which of the many programs you qualify for is tougher than it should be. The IRS “tax assistant,” housed in the “Tax Benefits for Education” section online, can help make sense of the credit mess in a few minutes. Any tax professional can also guide you. The important thing here is that you know they exist.
Think forward. Yes, tax planning is important too.
Owe too much? Big refund on the way? Then it might be time to readjust how much tax is withheld from your paycheck. Before getting down to the nitty gritty tax calculation, though, think about your refund personality. While receiving a big refund technically means you’ve given Uncle Sam an interest free loan, some people swear by refund-as-forced-savings. And in this next-to-no interest rate environment, you’re not really losing much by way of forgone earnings. However, if you’re disciplined, changing your withholding so you receive bigger paychecks gives you ultimate financial flexibility.
Have you made donations? Think back to all of the charitable donations you’ve made or the Goodwill runs you’ve taken for some additional tax savings. This will only work if you itemize your taxes. And you have to be somewhat organized because receipts are required. If tax year 2013 is a lost cause, get it together in 2014 with use of Turbo Tax’s free “It’s Deductible” tool, available online or as an app.
Don’t forget about the future. As your income grows, you’ll be looking for all sorts of ways to reduce your tax burden. One of the smartest is to take advantage of pre-tax workplace retirement plans. It’s a double benefit because you are saving for your future plus your taxable income falls today. Better yet, many employers offer matching funds, free money you don’t want to leave on the table.
Prior to April 15, you also have the option to fully fund IRAs for the previous tax year. It’s a funky rule, but don’t question it. Rather, take advantage of the extra time you have to open or fund an IRA or Roth IRA account. Roth IRAs won’t give you a tax break today, but you will be able to take the money out tax-free at retirement. Plus there are ways to tap the principal now without penalty, making it so versatile that I think of it as the little black dress of personal finance.
Kara McGuire is a personal finance writer and a St. Paul mother of three.
