Taxes + Kids isn't the usual equation, but it can sure save you money! There are different deductions and exemptions that can save you on childcare expenses and college savings! Read on to learn more about Virginia's opportunities to save money on your taxes.
Child and Dependent Care Expenses
Did you know that an exemption exists just for having dependents? That’s right! For each dependent you claim on your tax return, you can exempt $930! There are special rules if you’re filing Filing Status 3 or the Spouse Tax Adjustment, so take heed when looking for this exemption. (Note: part-time Virginia residents must pro-rate this amount!)
In addition to the dependent exemption, the United States government has a Federal Child Care Expense Credit. This one is a bit trickier because there’s a top limit that you may deduct. If you’re filing as a couple, this limit is $6,000 or the true price if under $6,000.
Let’s go through an example, as this can be a bit confusing. Imagine John and Jane, a married couple. They have yearly child care expenses of $2,000. Remember the top limit is $6,000, but since their yearly expenses are less than the federal allowance, they will only subtract $2,000 total from their tax return.
Example 2: Imagine another married couple named Tim and Nancy. Their childcare expenses were $8,000 for the year. However, since the federal limit is $6,000, the maximum they can subtract is $6,000. Note that you can claim the Federal Child Care Expense Credit regardless of your income, too!
There are a few additional caveats to this credit: the recipient of child care payment cannot be your spouse, biological parent of the child, or another dependent on your tax return. This means you can’t “pay” your spouse to be a stay-at-home parent, and your children babysitting their siblings can’t count toward this credit. In addition, if your employer gives you money to help pay for these expenses or money withheld to pay, you must subtract this from the amount you claim.
We understand it’s hard to think about college if your children are still little! The Virginia College Savings Plan Prepaid Tuition Contract Payments and College Savings Trust Account Contributions can help plan for your child’s future. This includes Virginia 529, Virginia prePAID, Virginia inVEST, College America, and College Wealth. Earnings in these accounts are federal and state tax-deferred and also excluded from income taxes when being used for higher education. You can deduct up to $4,000 per year (with certain restrictions).
With Virginia College Savings Plan Prepaid Tuition Contract Payments and College Savings Trust Account Contributions, Favorable Gift Treatment also comes into account. This clause allows contributions to those savings accounts to count as a gift. This means you can gift these accounts up to $15,000 (if single) or $30,000 (if married) completely tax-free every year! There’s also a 5-Year averaging provision that allows a one-time monetary gift into this account to be treated as if the amount goes in over the span of 5 years. These contributions would be $75,000 (if single) or $150,000 (if married).
However, if you gift more than the limits, the gift tax will begin to apply.
You dedicate so much to your kids, and your tax savings are one small way your hard work can pay off! Take advantage of the credits that exist and the college saving accounts to prepare for your family’s financial future and stay on track of your financial goals!
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