Your kids are getting older. Before you know it they’ll be dating, driving and entering college (if they aren't already!). Tax breaks drop dramatically as your children grow up, but you may be able to offset the losses with some timely tax planning. Consider the following tax events based on the age of your child:
- Age 13: No more dependent day care credit. The maximum annual credit for the cost of caring for your children while you and your spouse work, is generally $600 for one child and $1,200 for two or more children. But the credit is only available for children under age 13.
Tax move: Now that your child is a teenager, hire him or her to work at your business. Typically, the child will owe little or no income tax on the wages, and might even be able to claim an exemption from withholding.
- Age 17: Child Tax Credit (CTC) no longer available. With the CTC you receive a $2,000 credit ($1,400 of which is refundable) for each child. Unfortunately, the credit disappears when the child reaches age 17. Remember, a tax credit is a dollar-for-dollar reduction of your taxes due, so as each child reaches 17, your taxes will go up by the full amount of the previously claimed credit.
Tax move: Claim a nonrefundable $500 credit for a dependent who isn’t a qualifying child for the CTC. Typically, this is available to parents of high school seniors and college students.
- Age 19 or 24: Goodbye qualifying child. At 19, your child is no longer eligible for the $500 dependent credit as a qualifying child, unless they are a full-time student. In that case, they stay eligible for another four years (until age 24). Once they cease to be a qualifying child, they may still be eligible for the credit as a qualified relative, but more restrictions (such as earned income) are in place.
Tax move: If your child is going to college, claim one of the higher education credits for qualified college expenses. For instance, the maximum American Opportunity Tax Credit (AOTC) is $2,500 per student per year, although it is subject to an income phaseout. Once they are out of school, call to discuss your situation. We can run through some tax planning scenarios to determine what other tax breaks may be available to you.