As parents, we always hope that our kids will grow up to be successful and happy. I know that I also worry that they'll understand how to manage their finances and make smart financial decisions. No matter how old, there are always ways to use your tax knowledge to help your children or grand-children start off on the right foot. Here are a few thoughts to consider:
Contribute to a 529 plan for College Savings. These state-sponsored plans will not only let the earnings on your investment grow tax free, b ut many states will also offer a tax break for making contributions. The money you contribute can be used tax-free to cover college-related expenses when that time comes.
Use the gift-tax break to your advantage. In 2011, you can give a gift of up to $13,000 per person before being subject to any gift tax rules. You can also avoid paying a gift tax by making college tuition payments directly to the educational institution where your beneficiary is enrolled. By doing so, these direct payments are excluded from the annual gift-tax limit of $13,000.
Claim an Education Credit for your tuition payments. If your child is in their first four years of college, you may be eligible for the American Opportunity Credit. This credit may reduce your tax bill by up to $2,500 per student. The student must be a dependent on your tax return and you must have at least $4,000 in college-related expenses to qualify for the entire credit. If you have any college related expenses at all, save your receipts.... You may be eligible for a partial credit!
Pass along the Student Loan Interest Deduction. Failure to deduct student-loan interest expenses is one of the most common mistakes taxpayers make. If you are paying back student loans for your kids, your child may be able to take advantage of the deduction. Your child, not claimed as your dependent, is eligible to deduct up to $2,500 in student-loan interest paid by mom or dad. Your child DOES NOT have to itemize to take advantage of the deduction!
Open a Roth IRA account for your children or grand-children. Once your child or grandchild starts earning money, they can contribute up to the amount of their earned income for the year or the plan maximum to a Roth IRA. In 2011, the maximum amount that can be contributed is $5,000. You may contribute money on their behalf but won't see a tax break for it. It's the beneficiary that will reap the benefits down the road. Your beneficiary will not be required to take distributions from their Roth IRA at any age. Qualified distributions, including earnings, from a Roth IRA are not included in income. A qualified distribution is one made after the Roth IRA has been established for 5 tax years and made on or after the date the account-holder reaches age 59 ½, made because they become disabled, used to pay qualified first-time homebuyer expenses or other allowable exceptions. Early distributions from Roth IRAs are subject to 10% additional tax based on the taxable amount of the distribution.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.