Saturday, January 30, 2010

tax perks of having babies

i love doing taxes. perhaps it is the nerdy accounting major in me, but i look forward to collecting W-2s and filing out our 1040s each year. this year was especially exciting because we have parker, and everyone knows that babies = tax benefits! but really, how much do babies save on taxes? the major perks of having an infant (this list is by no means exclusive, so if i've left anything off, please share!):

1. $1,000 child tax credit (per child). this is my fav. benefit because it is a CREDIT not just a deduction. so if you owe $5,000 in taxes this year, this reduces your bill to $4,000. sweet! plus the AGI limit is $110,000 so most people qualify.

2. $3,650 personal exemption (per child). this helps reduce taxable income, but is not as nice as the child tax credit because it is a deduction. if you are in the 15% tax bracket, this saves $3,650*.15 = $548 back in your pocket . not too shabby!

3. 20-35% of $3,000 (per child) childcare tax credit. if you paid for childcare in 2009, part of it will likely come back in your pocket (making the financial burden of childcare a lil' more bearable). the income brackets are pretty tight for this with AGI>$43,000 only receiving 20%. so if you paid the maximum $3,000*.20 = $600 back in your pocket. obama is looking at widening the range for parents getting the 35% credit to $83,000. right low the maximum AGI for that bracket is $15,000, and i have a hard time believing there are many people out there with joint income < $15,000 who pay $3,000 in childcare costs every year.

4. $3,043 earned income credit. if you are in lower tax brackets, this can be a huge credit, but the AGI for mfj is around $40,000 so most working couples do not qualify. i'm not sure exactly how the calculator for this credit works, but turbo tax or taxact crunches the numbers and yields $0-$3,043 of money back to you.

in total, a baby will likely yield $1,500-$5,000 cash when you file taxes. definitely not a reason to have a baby, but a sweet chunk of change for helping raise a lil' one :).

another way to lower state income taxes is by opening up a qualified 529 college savings plan for your child. for parker, we opened up an account called "The Gift Plan." it has the lowest annual fee of the accounts i researched (i.e. versus Arvest or Fidelity 529 plans) and it is sold directly from the state, which is why contributions are deductible up to $10,000 for married filing joint. also, if your AGI < $60,000, you can apply for a matching grant of up to $500. (i'm not sure how hard it is to get accepted).

if you live outside arkansas, i recommend this article that recommends the best 529 plans by state: http://www.kiplinger.com/features/archives/2009/06/best-529-plans.html (i know there are a lot of readers from oklahoma and kiplinger recommends the Oklahoma College Savings Plan that is sponsored by the state. and for all you texans out there, texas does not have state income tax so you should just pick one of the top performing funds that is not state sponsored. Kansas--you can invest in any state's 529 plan and still deduct it from state income taxes)

well that's plenty of numbers for one day. we have been snowed in for two days and have nothing better to do :). love you all and hopefully happy tax time for all new parents out there!

7 comments:

The Chiles Family said...

Question about "The Gift Plan". What if you leave the state of Arkansas? Does it still follow Parker, Can you still maintain it, or do you have to/ or can you roll it over to a different account? Just a thought...

Diet DP Loving Mom said...

i did our taxes and was pretty disappointed with the return. we make too much money to qualify for just about anything. but at least we got a little bit back this year!

Katie said...

LOVE THE 529!! I know that in Oklahoma, the money can still go to out of state schools (we double-checked that, assuming Cub will go to JBU ... :)). Great tax tips!

kristina said...

when i move back to america, i think you should do my taxes! :)

Diet DP Loving Mom said...

yes, fortunately or unfortunately, however you want to look at it, we do make too much. it's stinks. we live outside of philadelphia, so the cost of living isn't exactly cheap, and the gov't doesn't necessarily take that into consideration. oh well, i'm thankful hubby and i have great jobs, so i shouldn't complain. :)

Melissa McMahan said...

loved this post! super informative!!

Q, La, and Gooner said...

Oh, I likey this one!!! Thanks for sharing your tips!