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Calling all parents and students
Some great tax breaks are available to you
As any parent knows, rearing children and ensuring they receive a quality education can be expensive.
Fortunately, many tax breaks are available for parents and others who are supporting loved ones — as
well as for students themselves. So, be sure you take advantage of every tax break available to you.
Take advantage of tax credits.
You may be able to claim a $1,000 credit for each child under age 17 at the end of the calendar year. And you may be eligible for a credit for child or dependent
care expenses paid on behalf of children under age 13 that's worth at least 20% of qualifying expenses, subject to a cap. If you adopt, you may
be able to take a credit of $11,390 in 2007 or the employer adoption assistance program income exclusion, also $11,390 per eligible child. But note
that these credits include restrictions, and some phase out if your income is above certain levels. (See Chart 2 on page 6.) Also, unless Congress
acts, starting in 2007, the child and adoption credits are the only family or education-related credits that will provide any benefit against the alternative
minimum tax (AMT).
CHART 2:
2007 FAMILY AND EDUCATION TAX BREAK AGI PHASEOUTS |
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Adjusted gross income phaseout ranges |
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| Tax Break |
Single filers |
Joint filers |
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| Child tax credit¹ |
$75,000 - $95,000 |
$110,000 - $130,000 |
| Adoption credit |
$170,820 - $210,820 |
$170,820 - $210,820 |
| ESA contribution |
$95,000 - $110,000 |
$190,000 - $220,000 |
| Hope credit |
$47,000 - $57,000 |
$94,000 - $114,000 |
| Lifetime Learning credit |
$47,000 - $57,000 |
$94,000 - $114,000 |
| Tuition and fees deduction |
$65,000 - $80,000 |
$130,000 - $160,000 |
| Student loan interest deduction |
$55,000 - $70,000 |
$110,000 - $140,000 |
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| ¹ Assumes one child. |
| Data source: U.S. Internal Revenue Code |
Hire your kids for additional tax benefits.
If you own a business, you can hire your children and fully deduct their pay. And if your business is unincorporated and has no owners
other than you and certain family members, and your children are under age 18, you won't owe any payroll or unemployment taxes on
their wages. Your kids benefit too: They can earn as much as $5,350 (the 2007 standard deduction amount for singles) and pay zero
federal income tax. They can earn an additional $4,000 tax-deferred if they contribute it to a traditional IRA, though that will make them
ineligible to make Roth IRA contributions. Keep in mind that the children must perform actual work for wages in line with what you would pay
nonfamily employees.
Start your teen's retirement saving now with a Roth IRA.
Roth IRAs can be perfect for teenagers because they're typically in low tax brackets and have many years to let their
accounts grow tax free. The contribution limit for minors is the same as for adults under 50: the lesser of
$4,000 (in 2007) or 100% of earned income from a legitimate job reported on their tax returns. (For more on
Roth IRAs, see page 13.)
Consider a 529 plan.
plans enable parents (or grandparents) to either secure current tuition rates with a prepaid tuition program or create tax-free savings plans to fund
college expenses. And the plans are now even more attractive because Sec. 529 provisions that had been set to expire after 2010 have been
made permanent. Most 529 plans are state-sponsored, though private institutions can offer prepaid tuition plans. 529 savings plans typically offer
much higher contribution limits than Coverdell Education Savings Accounts (ESAs — see next paragraph), but fewer investment options. Distributions
used to pay qualified higher education expenses are income-tax free. 529 plans provide estate planning benefits as well: Your contribution can qualify
for the $12,000 annual gift tax exclusion ($24,000 for gifts by married couples). By filing a gift tax return, you even can elect to use annual
exclusions for five years all at once (for example, a $60,000 contribution or a $120,000 joint contribution).
Cover more education costs with Coverdell ESAs.
ESAs allow you more investment options than 529 plans, and the expenses can be for elementary (including kindergarten) and secondary school
in addition to college. Subject to income limitations (see Chart 2), you can contribute $2,000 to an ESA to benefit a child under age 18
(unless the child has special needs, in which case special rules apply). The contribution isn't deductible, but distributions of earnings will be tax
free if used to pay for the beneficiary's qualified education expenses. The deadline for contributions is the due date of the income tax return for
the year of contributions — April 15 of the following year.
Teach yourself — and your kids — about education credits.
When your kids hit college, you may be able to claim a Hope credit for the first two years of postsecondary education.
For qualified tuition and related expenses required for enrollment on at least a half-time basis, the maximum credit is $1,650 per
student for 2007. Similarly, you may be eligible for the Lifetime Learning credit of up to $2,000 per taxpayer
for an unlimited number of years of postsecondary, graduate and certain other education expenses. If your income is too high to qualify
for either credit (see Chart 2), your child may be able to claim one of the credits. You or your child may claim either the Hope or Lifetime Learning
credit and take tax-free 529 plan or ESA distributions as long as the 529 plan or ESA funds aren't used to pay the same expenses for which
the credit is claimed.
Set a course for education-expense deductions.
If your income exceeds the limits for the education credits, you may be able to deduct "above the line" a portion of qualified higher
education tuition and fees. This deduction is also subject to adjusted gross income (AGI) limits, but they're higher. (See Chart 2.) The maximum
deduction for 2007 is $4,000.
Deduct student loan interest.
Taxpayers paying interest on student loans may be able to deduct up to $2,500 of interest above the line.
Income phaseout ranges are now adjusted annually for inflation. (See Chart 2.)
Tax Action Strategy:
SHIFT INCOME TO CHILDREN
For children ages 18 and older, all 2007 income (earned and unearned)
will be taxed at their own, generally lower, marginal rates — as low as
5% on long-term capital gains and qualified dividends. So giving them
income-producing assets can save your family tax dollars this year. In
2007, you and your spouse together can give up to $24,000 of assets
free of federal gift tax to each of your children (or grandchildren) without
using any of your $1 million lifetime gift tax exemption. (For more on gift
tax planning, see page 15.)
Until last year, the "kiddie" tax applied to children under age 14. But for
2006 and 2007, the rule has been expanded to apply to children under
age 18. As a result, their unearned income that is beyond $1,700 will
be taxed at their parents' marginal rate — so, the income tax benefit
of shifting income to them will be limited. And in 2008, the kiddie tax
will be further expanded to children who qualify as dependents because
they are either under age 19, or under age 24 and a full-time student, if
their earned income doesn't exceed one-half of the amount needed for
their support. Consider whether these changes alter your income tax and
estate tax planning.
Download printable Tax Guides PDF >
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7 Penn Plaza, Suite 804, New York, New York 10001 | T: 212-697-8540 | F: 212-573-6805 | E: info@tarlow.net
Copyright 2007 Tarlow & Co., C.P.A.'s
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