Tax Tips for Parents
Each month I add up what we spend on what my husband and I call our children's "developmental" costs. This ranges from academics to sports to just plain old fun activities. Each month we say we're going to cut activities, and each month that doesn't happen. As our children's interests grow, we end up adding more activities to the calendar and the budget! I can find some relief in looking over the line items though. As a working mom filing my taxes jointly, I can claim many of these programs as tax deductions.
We asked tax expert Alisa Wade, CPA, MST, CPFP of International Consulting Services Group, Inc., for some college planning advice and tips on how to reduce our tax bill through our children's everyday costs.*
Sherri: Can you explain how the MA college savings tax deduction law impacts me from a tax perspective?
Alisa: It's exciting that MA has joined many other states in giving a deduction for contributing to a MA college savings plan. For a couple filing as married filing jointly, this means deducting $2,000 on your state tax return and receiving $100 back in your refund for funding $2,000 or more into a MA college savings plan. For single filers it means $50 back in your refund. With this yearly benefit, it makes financial sense to save for college in the U.Fund, the MA 529 plan, or the Massachusetts U.Plan Prepaid Tuition Program, if you're not already. Make sure to tell your tax preparer the amount you contributed to these college savings plans to receive your deduction, and be sure to continue contributing for next year's deductions.
Sherri: We want our children to participate in extracurricular academic, arts, and sports programs. What type of programs can working parents deduct on their taxes?
Alisa: Dependent care expenses are allowed if they are necessary so that the parents or guardians can work. These expenses include daycare, preschool, kindergarten, after-school programs, and camps. Review all activities your children (under 13 years of age) have enrolled in during the school year and summer time to make sure you are receiving your proper deductions. This could include anything from summer camps, art courses, and sports clinics to programs like Kumon. If both parents have taxable earned income, they can take a credit for dependent care for children under 13 years of age of up to $3,000 per child capped at $6,000 total.
Sherri: As a tax expert and mom of three spanning from middle school to high school, what would you have done differently with college planning?
Alisa: As a mom of 3 college-bound kids, I definitely suggest to my clients and all who listen to start saving for college early. Let your money work for you by investing it in a college plan as early as possible. Try to set up an automatic payment monthly with an amount that works for you. Then sit back and watch it grow. If your kids are older, talk with them about what is feasible for you to pay for their college education. It's better to have this conversation before they get set on a school. I have many clients who tell their children what they will be able to pay per year for college (maybe in-state public school prices) so that their children know what's feasible. With my kids, we've discussed that their dad and I will pay for three years and they are responsible for funding one year. Communicate what works for your family to your student when they start looking at colleges.
During tax season I think of the old parenting proverb - "Days go by slow but years go by fast." This is the time of year I closely examine our 529 plans. We started our 529s when our now middle schoolers were born. Each month I didn't see much growth, so I stopped checking statements so frequently. I knew we contributed what we felt comfortable with. And by switching my review to closer to a yearly basis, I was able to better see the impact of our saving. Now, twelve years later, I see even more growth and realize there is a huge light at the end of this tunnel we call saving for college! I'm thrilled we started when our kids were young, allowing them to have more choices when they graduate. Twelve years later I can say it was well worth re-proportioning our budget and giving up a few cups of coffee and babysitters for the growth I see in their college savings funds today.
*The guidance provided within this blog post reflects the opinions of Sherri Galego and Alisa Wade and are independent from MEFA.