There are a number of common tax error made by parents which can be costly if you are not careful.
Here are several of the most frequent, and how to avoid them.
1. Not getting a Social Security Number (SSN) quickly for each new child
You can’t claim them on your taxes if they don’t have a number.
2. Not writing down the correct SSN numbers
This is a time-wasting and potentially costly error.
3. Not taking an adoption credit
If you are adopting, keep track of all involved expenses. It can be a lengthy process. File all the expenses the year the adoption is finalized. You could get around $13,000 in tax credit.
4. Not making the most of a Dependent Care Flexible Spending Account (FSA)
A Dependent Care FSA allows you to set aside up to $5,000 in pre-tax dollars to pay for childcare expenses. Ask your employer if it is possible to set up an account if this is not offered in your workplace already.
5. Not keeping track of dependent care expenses
If you pay for childcare, be sure to have the name, address and SSN of every caregiver you use. Don’t forget to claim for after-school programs for any children younger than 13. Summer day camp fees also count if a sole parent or both parents work full time and the child is under 13.
6. Forgetting to claim head of household status
This is important for single parents in particular, since it offers a number of tax benefits and allows them to claim their children as dependents.
7. Missing out on the child tax credit
If you are in a lower income bracket, this can be worth up to $1,000. The child must be under 17 and live more than half the year with the parent claiming the credit.
8.Forgeting to file taxes for an older child who has a part-time job
An older child might also be required to file taxes even if they are still a dependent. Failure to file could mean missing out on a refund, because children don’t usually earn enough be liable for taxes but the employers may still withhold them. The only way to get that money back is for the child to file a tax return.
9. Not making the most of tax-advantaged savings plans for your child
If you don’t have a 529 account for each child, you could be missing out. These are state-run college savings accounts that allow parents (and family members) to invest after-tax money and grow it tax free. There is no penalty for taking out the money as long as it is used to pay expenses related to higher education, such as tuition and books.
A Coverdell Savings Account is another option. It has a strict contribution limit of $2,000 a year and income limits, but the contributions are tax deductible.
Parents can claim student loan interest on their own taxes if the college student is still a dependent, even if the college student is the one paying the loan interest. States have different rules and regulations about contributions to college savings plans, so check savingforcollege.com to see how much you can contribute each year that will be tax deductible.