How To Save Taxes With Children

October 8, 2019 | By: Robert A. Green, CPA

Children are lovely, but they also cost a lot of money on childcare and education costs. With careful tax planning, you can generate significant tax savings.

Consider shifting a portion of investment income from the parent’s tax return to the children. However, avoid having too high unearned income for younger children as that might trigger the “kiddie tax,” which defeats the intended purpose. (See below: The “kiddie tax” rules and how they affect you.)

If you have a family business, consider hiring your children to shift earned income to the children’s lower tax brackets. For sole proprietorships and LLC/partnerships, you might also save social security taxes. (See below: Tax benefits of putting junior family members on the payroll.)

There is a litany of tax planning strategies to consider while saving for education, including college. These include qualified tuition programs (“529 plans”), tax-exempt bonds, Coverdell education savings accounts, tuition tax credits, employer educational assistance programs, college expense payments by grandparents and others, the student loan interest deduction, borrowing against retirement plan accounts, and withdrawals from retirement plan accounts. (See below: Tax planning for college, and Qualified tuition programs-“529 plans”)

As a working parent, you might qualify for the dependent care credit or an employer-provided dependent care flexible spending account (FSA). Determine which one is better for your tax bracket and needs. (See below: Dependent care credit/dependent care flexible spending account.)

The new tax law, TCJA, made the child tax credit (CTC) more valuable, and more taxpayers should qualify for this credit. (See below: Child tax credit.)

Client Letters from Thomson Reuters/Tax & Accounting:

  • The “kiddie tax” rules and how they affect you (page 3)
  • Tax benefits of putting junior family members on the payroll (page 5)
  • Tax planning for college (page 7)
  • Qualified tuition programs-“529 plans” (page 14)
  • Dependent care credit/dependent care flexible spending account (page 16)
  • Child tax credit (page 20)

We are emailing a PDF file containing the above Client Letters, so sign up for our Email List.

If you would like to discuss any of these tax planning strategies, contact your assigned CPA in our firm, or consider a consultation. Contact us with any questions.

Thank you,

Robert A. Green, CPA
Managing Member, Green, Neuschwander & Manning, LLC