Common Tax Mistakes Made by Parents
There are a number of common tax errors made by parents which can end up being costly. Here are a few of the most frequent, and how to avoid them.
- Not getting a Social Security Number (SSN) quickly, after each child is born
- You can’t claim them on your taxes if they don’t have a social security number.
- Writing the incorrect social security numbers (SSN) on documents
- This will end up a time-wasting effort and a potentially costly error.
- Not filing an adoption credit on your tax return
- If you are adopting a child, keep track of all the expenses involved in raising that child. It can be a very lengthy and exhausting process. Be sure to file all of the associated expenses the year that the adoption is finalized. It’s possible you could get around $13,000 in tax credits.
- Not making the most from a Dependent Care Flexible Spending Account (FSA)
- A Dependent Care FSA allows you to put aside up to $5,000 in pre-tax dollars to pay for your childcare expenses. Ask your employer if it’s possible to set up a DCFS Account, if this is not something offered in your workplace currently.
- Not tracking your dependent care expenses
- If you have children and are paying for childcare, it is critical that you write down the name, address and SSN/TaxID/EIN of every caregiver you use. Don’t forget to claim credit for after-school programs for any of the children younger than the age of 13 years old. Seasonal summer day camp fees also count toward a credit if a sole parent, or both parents, work full time and the child is under the age of 13.
- Forgetting to claim head of household status
- This is imperative for single parents, because it offers a number of tax benefits allowing them to claim their children as dependents.
- Missing out on the child tax credit
- If you fall in the lower income bracket, this can be worth up to $1,000. The child must be under 17 years of age and live more than half of the year with the parent claiming the credit.
- Not filing taxes for an older child who works a part-time job
- An older child may be required to file taxes even though they may still be classified as a dependent. Failure to file could mean that you are missing out on a refund. Even though children do not usually earn enough in wages to be liable for taxes, it is possible that the employers will still withhold them. The only possible way to get that money back, is for the child to file a tax return.
- Not making the most of tax-advantaged savings plans for your children
- If you have not set up a 529 account for each of your children, you could be missing out on potential benefits. 529 accounts are state run college savings accounts that allow the parents, and other family members, to invest in after-tax money and watch it grow tax free. There is no penalty for taking out the money, as long as it is used to pay for higher education related expenses, such as tuition and books.
- A Coverdell Savings Account is an alternate option. It has a strict contribution limit of $2,000 a year, as well as income limits, with the contributions being tax deductible.
- Missing out on the benefits associated with college costs
- Parents may claim the student loan interest on their taxes, while the college student is still a dependent, even if the college student may be the one that is paying the loan interest. Each state has its own rules and regulations regarding contributions to college savings plans, so be sure to check SavingForCollege.com to see how much you may contribute each year that can be deducted on your taxes.