Becoming A Parent

A few financial guides with important information regarding the fiscal implications of having and raising a child.

Financial Guides

Once you have a child, financial planning for the future becomes even more essential. How will you finance child care, medical bills, food, education, clothing, toys, and education savings? What will you need to spend money on and how much will each item cost? Here is some of the information you will need.

This Financial Guide provides you with guidelines on handling the expenses a child brings. Obviously, we cannot offer precise costs because the costs hinge on variables such as family size, family income, and geographic location. However, we can suggest some rough (often very rough) estimates for the average sized family of two adults and two children and to at least provide a starting point for your planning. Obviously, the costs for later years will go up as inflation takes its toll.

Knowing what to expect will allow you to plan for the future, thereby increasing your chances that you will not fall short of your financial goals. Indeed, this is the time to review and update if necessary, your financial plan.

What Will It Cost You

Here is a breakdown of the items you’ll need and an estimate of their cost. The costs are categorized chronologically, according to the child’s age.

Note: These estimates are for a first child. Bear in mind that second or third children will cost less than the first since you will already have purchased many of the items you need. If you have three or more children, you will spend about 22 percent less on each child. Also, note that in the case of multiple births expenses will be higher than (although not double) those of a single birth.

Government estimates say that a middle-income family in 2013, defined as having an annual income between $61,530 and $106,540, will spend a total of $245,340 to raise a child to age 17. This figure represents a 1.7 percent increase from 2012 and does not include expenses incurred beyond the age of 18. If you include the cost of college, whether public or private, that cost goes up significantly. And, families that earn more generally can expect to spend more on their children.

Planning Aid: For an estimate of the amount of money you would have at the time your child enters college if you begin saving now, see the Financial Calculator: The College Savings Plan Calculator.

Related Guide: If you are ready to start planning now for your child’s future college education-and indeed the time to start is now-please see the Financial Guide: YOUR CHILD’S COLLEGE EDUCATION – How To Finance It.

Birth through Infancy

Here are the costs you can expect up to birth and during the first year:

Note: For a second or third child, you will spend much less on furniture, clothing, and toys, but health care, child care, and food will remain the same.

Hospital Costs

According to the Transforming Maternity Care Partnership, in 2011, an uneventful hospital delivery, on average, in the United States cost between $10,657 (vaginal birth, no complications) and $23,923 (cesarean section birth with complications). The actual costs you pay, of course, vary depending on your health care coverage.

Baby Supplies and Equipment

Before you bring the baby home, you’ll buy a crib, a changing table, and a swing or bouncy seat. The moderately priced versions of these three things will cost you about $1,200. You’ll also need at least one stroller that you can expect to pay about $400 for. A full-size infant car seat will cost you about $150-$200, and a full-size high chair will cost $150. Finally, you will spend several hundred dollars on washcloths, sheets, blankets, towels, undershirts, onesies, and other baby clothes. Also, think about whether you plan to use a diaper service, cloth diapers, or use disposable ones.

Feeding and Diapers

The American Academy of Pediatrics recommends exclusively breastfeeding your baby for at least 6 months. Many women, of course, choose to breastfeed longer than that. Nursing mothers will have to invest in several good nursing bras and nursing pads (about $50) as well as a nursing pillow (about $25). If you plan to return to work after 3 months, consider investing in a hospital-grade breast pump, which will run you about $400. In comparison, a year’s worth of ready mix powder formula costs about $1,350. If you buy the ready-to-serve type of formula the cost, is even more, running well over $2,000. You’ll also need a year’s supply of bottles, at about $90, and you’ll have to add another $40 to replace the nipples at least twice in a year.

When your baby is ready for solid foods, you will also need to account for the cost of rice cereal and baby food.

Diapers are another expense you need to consider. Cloth diapers are the least expensive option. Disposable diaper costs for the first year run about $850, and a diaper genie costs about $40.

Child Care

Child care expenses vary widely. Child care in a day care center costs much less than a live-in nanny (unless you have multiples, then a nanny or au pair is the less expensive option), and prices for daycare centers vary widely. Child care in a day care center costs much less than a live-in nanny. A mid-priced day care center charges on average $975 per month for your infant’s care, or close to $12,000 per year.

Health Care

Your infant will visit the doctor about six times during his or her first year, including well-baby check-ups as well as the inevitable colds and fevers of infancy. How much you will spend for doctor visits during the first year depends on your health insurance.

Toys and Clothes

You will spend about $500-$600 on toys and clothing during the first year (in addition to what you bought for the layette.)

Total for the First Year

Your total expenses for the first year run about $15,000-$18,000. The biggest variable is the cost of health care.

Ages One through Six

During these years, you’ll spend about $1,000 on toys and clothes, and about $2,200 a year on food. If your child attends daycare or pre-school, add in the cost of these services. Daycare will cost you an average of $12,000 per year while pre-school costs vary widely. Again, health care costs depend on your health coverage.

Ages Six through Twelve

This is the time when the overall expenses of child-rearing drop and families can save more. During these years, your child care expenses will drop drastically. Health care costs generally stabilize unless of course, your child begins orthodontia during this stage. Then, you’ll have to pay more. You are likely to spend more than in the previous stage on clothing, toys, and entertainment, but your kids won’t be demanding the high-ticket clothing and other items of adolescence. The bill for food will be just slightly more than what it was in the previous stage. On the negative side, now that your kids are in school, you’ll want to pay for all those extras that middle-class kids have: dancing and music lessons, sports participation, and so on. And, if you decide to send your kids to private school or to summer camp, these expenses will have to be added in.

Ages Thirteen through Eighteen

During this stage, you can expect your child’s food, clothing, and entertainment bill to greatly exceed what it was during the previous stage. For instance, food costs will increase as a result of growth spurts in your adolescent and clothing costs are likely to rise as well as your teen takes more of an interest in his or her appearance.

Once your teen starts driving, your auto insurance will go up. The extra cost could be anywhere from $300 to $1,000, depending on your state of residence and whether your child is a boy or girl. If you intend to buy your child a car, add this expense in as well.

Sweet-16 parties, bar and bat mitzvahs, orthodontia, SAT-preparation courses, music lessons, sports…these are just some of things you might be paying for during those years.

Teaching Your Kids How to Handle Money

The best time to start instilling financial skills and values is when children are young. Start giving your kids an allowance once they reach school age. Let them participate in making the decision of how much their allowance should be.

Some parents may want to require kids to do household chores to earn the allowance. Or, parents might want to provide an allowance, but pay kids extra for the performance of tasks. This incentive plan is, of course, a matter of individual child-rearing philosophy, but it does get the message across that money does not grow on trees.

Give your kids control over their own money (their allowance and whatever monies you give them that are not earmarked for some particular purpose). You can make suggestions to them about what they should do with it-i.e., that they might spend half and save half but allow them the final say on what happens to the money.

Let them see the consequences of both wise and foolish behavior with regard to money. A child who spends all of his money on the first day of the week is more likely to learn about budgeting if he is not provided with extras to tide him over.

How much allowance to provide is a matter of parental discretion. Most parents provide about $7 per week to their elementary school children, and from $12 to $20 a week to kids in junior high.

Savings and Investment

Beyond the basics of budgeting and saving, you will want to get your child involved in saving and investing. The easiest way to do this is to have the child open his or her own passbook savings account.

If you want your child to get familiar with investing, there are various child-friendly mutual funds available. The mailings from the fund can be a source of education. Or you may want to get the child interested in individual stocks.

You may want to start a “matching” program with your kids to encourage saving. For instance, for every dollar that the child puts into a savings account or investment, you might match it with 50 cents.

If you want to get your kids involved with investing, it will usually have to be done through a custodial account. There are generally two types of widely used custodial accounts-one is set up under the Uniform Gifts to Minors Act, and the other under the Uniform Transfers to Minors Act. The type of custodial account available depends on which state you live in.

With a custodial account, the child is the owner, but the custodian (usually a parent) manages the property until the child reaches the age of majority under relevant state law, either 18 or 21. The custodian must follow certain rules concerning management of the property in the account. These rules are intended to ensure that the custodian does what is in the child’s best interests.

IRAs for Kids

If your child has earned income from a paper route or babysitting, for example, or from working in the family business he or she can contribute earnings to an IRA. The IRA can be an extremely effective investment for a child because of the IRA’s tax-deferral feature and the length of time the money is left in the IRA. If $3,000 per year is contributed to the child’s IRA for ten years and the money is left to grow until the child reaches age 65, the amount in the IRA could reach $600,000 or more, depending on the returns on the investment. In 2014, your child can contribute the lesser of his or her earned income for the year or $5,500, either to a traditional IRA or a tax-free Roth IRA. The contribution limits are the same for both types of accounts.

To replace the “lost” earnings, the parents can give $3,000 per year to the child (or the amount of earned income the child has, if less). The child may have to file tax returns.

The drawback, of course, is that, with some exceptions, the money cannot be withdrawn before age 59-1/2 without tax penalty.

Taxes and Credit

Kids can learn to use automatic teller machine cards for their savings accounts. They can also start using credit cards at an early age-with parental counsel and involvement. They can learn the concepts of incurring and paying off debts both from credit card use and from small loans that parents make them.

It is important to familiarize kids with paying taxes as well. If children have to file tax returns-as they would with an IRA–allow them to participate in the process; this will get them used to the idea of yearly tax payments, and can also be an opportunity for learning about how governments are run with tax revenues.

Note: One side benefit of getting your kids involved in money management is that it may help to avoid the “math phobia” some kids experience in junior high school.

Tip: Professional guidance should be considered for a life event change as major as a marriage of divorce.

Source: Expenditures on Children By Families 2013, US Department of Agriculture Publication Number 1528-2013. Before-tax Income of $61,530 and $106,540 (Average = $82,790).

 

Child’s Age Misc.HousingFoodTransport Clothing Health Care Child Care & EducationTotal
Up to 2$910$4,070$1,450$1,730$790$900$3,090$12,940
3-5$1,120$4,070$1,550$1,780$640$850$2,960$12,970
6-8$1,130$4,070$2,180$1,910$710$990$1,810$12,800
9-11$1,130$4,070$2,490$1,910$740$1,060$2,280$13,680
12-14$1,200$4,070$2,680$2,040$870$1,500$2,060$14,420
15-17$1,080$4,070$2,670$2,200$940$1,410$2,600$14,970
Total$19,710$73,260$39,060$34,710$14,070$20,130$44,400$245,340

 

If you have a household employee, you may need to pay state and federal employment taxes. Which forms do you need to file for your household employees? Is your maid, housekeeper, or babysitter covered by the rules? This Financial Guide provides the answers to these and other questions.

This Financial Guide will help you decide whether you have a “household employee,” as defined by the IRS, and if you do, whether you need to pay federal employment taxes. It explains the rules for determining, paying, and reporting Social Security tax, Medicare tax, federal unemployment tax, federal income tax withholding, and state unemployment tax for your household employee. It also explains what records you need to keep. In addition, it provides you with the information you need to find out whether you need to pay state unemployment tax for your household employee.

While many people disregard the need to pay taxes on household employees, they do so at the risk of stiff tax penalties. As you will see below, these rules are quite complex and professional tax guidance is highly recommended.

A basic familiarity with these rules will make it easier to work with your tax advisor, saving you time, reducing tax costs, and avoiding tax penalties and interest charges.

Who is a Household Employee?

The “nanny tax” rules apply to you only if (1) you pay someone for household work and (2) that worker is your employee.

    1. A household employee is someone who does work in or around your home. Examples of household employees include babysitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers.
    1. A household worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it does not matter whether the work is full-time or part-time, or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job.On the other hand, if only the worker can control how the work is done, the worker is not your employee but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business. If an agency provides the worker and controls what work is done and how it is done, the worker is not your employee.

Example: You pay Betty to babysit your child and do light housework four days a week in your home. Betty follows your specific instructions about household and child care duties. You provide the household equipment and supplies that Betty needs to do her work. Betty is your household employee.

Example: You pay John to care for your lawn. John also offers lawn care services to other homeowners in your neighborhood. He provides his own tools and supplies, and he hires and pays any helpers he needs. Neither John nor his helpers are your household employees.

How Do You Verify That an Employee Can Legally Work in the United States?

It is unlawful for you to knowingly hire or continue to employ a person who cannot legally work in the United States.

When you hire a household employee to work for you on a regular basis, he or she must complete USCIS Form I-9 Employment Eligibility Verification. It is your responsibility to verify that the employee is either a U.S. citizen or an alien who can legally work and then complete the employer part of the form. Keep the completed form for your records. Do not return the form to the U.S. Citizenship and Immigration Services (USCIS).

Two copies of Form I-9 are contained in the UCIS Employer Handbook. Visit the USCIS website or call 800-767-1833 to order the handbook, additional copies of the form, or to get more information.

Do You Need to Pay Employment Taxes?

If you have a household employee, you may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax, or you may need to do both. To find out, read the table below.

If you:

Then you need to:

Pay cash wages of $1,900 or more in 2016 to any one household employee.Do not count wages you pay to:

  • Your spouse,
  • Your child under age 21,
  • Your parent, or
  • Any employee under age 18 during 6
Withhold and pay Social Security and Medicare taxes.

  • The combined taxes are generally 15.3% of cash wages.
  • Your employee’s share is 7.65%.

(You can choose to pay the employee’s share yourself and not withhold it.)

  • Your share is 7.65%.
Pay total cash wages of $1,000 or more in any calendar quarter of 2015 or 2016 to household employees.Do not count wages you pay to:

  • Your spouse,
  • Your child under age 21, or
  • Your parent.
Pay federal unemployment tax.

  • The tax is 6.0% of cash wages.
  • Wages over $7,000 a year per employee are not taxed.
  • You also may owe state unemployment tax.

Note: If neither of these two columns applies, then you do not need to pay any federal unemployment taxes. However, you may still need to pay state unemployment taxes.

You do not need to withhold federal income tax from your household employee’s wages. But if your employee asks you to withhold it, you can choose to do so.

Tip: If your household employee cares for your dependent under the age of 13 or your spouse or dependent who is not capable of self-care, so that you can work, you may be able to take an income tax credit of up to 35% (or $1,050) of your expenses for each qualifying dependent. For two or more qualifying dependents, you can claim up to 35% (or $2,100). For higher income earners the credit percentage is reduced, but not below 20%, regardless of the amount of AGI. If you can take the credit, then you can include your share of the federal and state employment taxes you pay, as well as the employee’s wages, in your qualifying expenses.

State Unemployment Taxes

To find out whether you need to pay state unemployment tax for your household employee contact your state unemployment tax agency. You’ll also need to determine whether you need to pay or collect other state employment taxes or carry workers’ compensation insurance.

Note: If you do not need to pay Social Security, Medicare, or federal unemployment tax and do not choose to withhold federal income tax, the rest of this publication does not apply to you.

Social Security and Medicare Taxes

Note: Additional Medicare Tax. As of January 1, 2013, employers are responsible for withholding the 0.9% Additional Medicare Tax on an individual’s wages paid in excess of $200,000 in a calendar year. An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of $200,000 to an employee. There is no employer match for Additional Medicare Tax.

Both you and your household employee may owe social security and Medicare taxes. Your share is 7.65% (6.2% for social security tax and 1.45% for Medicare tax) of the employee’s social security and Medicare wages. Your employee’s share is 6.2% for social security tax and 1.45% for Medicare tax for wages below the Additional Medicare Tax threshold (see above).

You are responsible for payment of your employee’s share of the taxes as well as your own. You can either withhold your employee’s share from the employee’s wages or pay it from your own funds.

Social Security and Medicare Wages

You figure Social Security and Medicare taxes on the Social Security and Medicare wages you pay your employee. If you pay your household employee cash wages of $1,900 or more in 2016, all cash wages you pay to that employee in 2016 (regardless of when the wages were earned) up to $118,500 are social security wages and all cash wages are Medicare wages. However, any non-cash wages (food, lodging, clothing, and other non-cash items) you pay do not count as social security and Medicare wages. If you pay the employee less than $1,900 in cash wages in 2016, none of the wages you pay the employee are Social Security and Medicare wages, and neither you nor your employee will owe Social Security or Medicare tax.

Wages Not Counted

Do not count wages you pay to any of the following individuals as Social Security and Medicare wages:

    1. Your spouse.
    2. Your child who is under age 21.
    3. Your parent.

Note: However, you should count wages to your parent if both of the following apply: (a) your child lives with you and is either under age 18 or has a physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter, and (b) you are divorced and have not remarried, or you are a widow or widower, or you are married to and living with a person whose physical or mental condition prevents him or her from caring for your child for at least 4 continuous weeks in a calendar quarter.

    1. An employee who is under age 18 at any time during the year.

Note: However, you should count these wages to an employee under 18 if providing household services is the employee’s principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation.

Also, if your employee’s Social Security and Medicare wages reach $118,500 in 2016, do not count any wages you pay that employee during the rest of the year as Social Security wages to figure Social Security tax (but continue to count the employee’s cash wages as Medicare wages to figure Medicare tax).

You figure federal income tax withholding on both cash and non-cash wages (based on their value). However, do not count as wages any of the following items:

  • Meals provided at your home for your convenience.
  • Lodging provided at your home for your convenience and as a condition of employment.
  • $255 a month in 2016 ($250 in 2015) for transit passes that you give your employee or, in some cases, for cash reimbursement you make for the amount your employee pays to commute to your home by public transit. A transit pass includes any pass, token, fare card, voucher, or similar item entitling a person to ride on mass transit, such as a bus or train.
  • Up to $255 a month in 2016 ($250 in 2015) to reimburse your employee for the cost of parking at or near your home or at or near a location from which your employee commutes to your home.

Withholding the Employee’s Share

You should withhold the employee’s share of Social Security and Medicare taxes if you expect to pay your household employee Social Security and Medicare wages of $1,900 or more in 2016. However, if you prefer to pay the employee’s share yourself; see “Not Withholding the Employee’s Share” in the next section.

You may withhold the employee’s share of the taxes even if you are not sure your employee’s Social Security and Medicare wages will be $1,900 or more in 2016. If you withhold the taxes but then actually pay the employee less than $1,900 in Social Security and Medicare wages for the year, you should repay the employee.

You pay withheld taxes as part of your regular income tax obligation. You don’t deposit them periodically subject to an exception for business owners. See “Payment Options for Business Employers” below.

Withhold 7.65% (6.2% for Social Security tax and 1.45% for Medicare tax) from each payment of Social Security and Medicare wages. Wages exceeding the $200,000 (single filer) threshold amount are subject to the additional Medicare tax or 0.9%. Instead of paying this amount to your employee, you will pay it to the IRS 7.65% for your share of the taxes. Do not withhold any social security tax after your employee’s social security wages for the year reach $118,500 in 2016 (same as 2015).

If you make an error by withholding too little, you should withhold additional taxes from a later payment. If you withhold too much, you should repay the employee.

Example: You hire a household employee (who is an unrelated individual over age 18) to care for your child and agree to pay cash wages of $100 every Friday. You expect to pay your employee $1,900 or more for the year. You should withhold $7.65 from each $100 wage payment and pay your employee the remaining $92.35. The $7.65 is the sum of $6.20 ($100 x 6.2%) for your employee’s share of Social Security tax and $1.45 ($100 x 1.45%) for your employee’s share of Medicare tax (for wages under $200,000 for single filers). You will pay $7.65 you withhold with $7.65 from your own funds when you pay the taxes.

Not Withholding the Employee’s Share

If you prefer to pay your employee’s Social Security and Medicare taxes from your own funds, you do not have to withhold them from your employee’s wages. The Social Security and Medicare taxes you pay to cover your employee’s share must be included in the employee’s wages for income tax purposes. However, they are not counted as Social Security and Medicare wages or as federal unemployment (FUTA) wages.

Example: You hire a household employee (who is an unrelated individual over age 18) to care for your child and agree to pay cash wages of $100 every Friday. You expect to pay your employee $1,900 or more for the year. You decide to pay your employee’s share of Social Security and Medicare taxes from your own funds. You pay your employee $100 every Friday without withholding any Social Security or Medicare taxes. For each wage payment, you will pay $15.30 when you pay the taxes. This is $7.65 ($6.20 for Social Security tax plus $1.45 for Medicare tax) to cover your employee’s share plus the $7.65 for your share. For income tax purposes, your employee’s wages each payday are $107.65 ($100 plus the $7.65 that you will pay to cover your employee’s share of Social Security and Medicare taxes).

Federal Unemployment (FUTA) Tax

The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. Like most employers, you may owe both the federal unemployment tax (the FUTA tax) and a state unemployment tax. Or, you may owe only the FUTA tax or only the state unemployment tax. To find out whether you will owe state unemployment tax, contact your state’s unemployment tax agency. See the list of state unemployment agencies at the end of this Guide for the address.

The FUTA tax is 6.0% of your employee’s FUTA wages. However, you may be able to take a credit of up to 5.4% against the FUTA tax, resulting in a net tax rate of 0.6%. Your credit for 2016 is limited unless you pay all the required contributions for 2016 to your state unemployment fund by April 18, 2017. The credit you can take for any contributions for 2016 that you pay after April 18, 2017, is limited to 90% of the credit that would have been allowable if the contributions were paid by April 18, 2016.

WARNING: Do not withhold the FUTA tax from your employee’s wages. You must pay it from your own funds.

You figure the FUTA tax on the FUTA wages you pay. If you pay cash wages to all of your household employees totaling $1,000 or more in any calendar quarter of 2015 or 2016, the first $7,000 of cash wages you pay to each household employee in 2016 is FUTA wages. (A calendar quarter is January through March, April through June, July through September, or October through December.) If your employee’s cash wages reach $7,000 during the year, do not figure the FUTA tax on any wages you pay that employee during the rest of the year. For a discussion of “cash wages,” see the section on Social Security Wages, above.

If you pay less than $1,000 cash wages in each calendar quarter of 2016, but you had a household employee in 2015, the cash wages you pay in 2015 may still be FUTA wages. They are FUTA wages if the cash wages you paid to household employees in any calendar quarter of 2015 totaled $1,000 or more.

Do not count wages you pay to any of the following individuals as FUTA wages:

  1. Your spouse.
  2. Your child who is under age 21.
  3. Your parent.

Example: You hire a household employee (not related to you) on January 1, 2015, and agree to pay cash wages of $200 every Friday. During January, February, and March, you pay the employee cash wages of $2,600. Because you pay cash wages of $1,000 or more in a calendar quarter of 2015, the first $7,000 of cash wages you pay the employee (or any other employee) in 2015 or 2016 is FUTA wages. The FUTA wages you pay may also be subject to your state’s unemployment tax.

During 2016, you pay your household employee cash wages of $10,400. You pay all the required contributions for 2016 to your state unemployment fund by April 18, 2017. Your FUTA tax for 2016 is $42 ($7,000 x 0.6%).

Do You Need to Withhold Federal Income Tax?

You are not required to withhold federal income tax from wages you pay a household employee. You should withhold federal income tax only if your household employee asks you to withhold it and you agree. The employee must give you a completed Form W-4, Employee’s Withholding Allowance Certificate.

If you agree to withhold federal income tax, you are responsible for paying it to the IRS.

Wages

You figure federal income tax withholding on both cash and non-cash wages you pay. Measure wages you pay in any form other than cash by the value of the non-cash item.

Do not count as wages any of the following items:

  • Meals provided at your home for your convenience.
  • Lodging provided at your home for your convenience and as a condition of employment.
  • Up to $255 a month in 2016 for bus or train tokens (passes) you give your employee, or for any cash reimbursement you make for the amount your employee pays to commute to your home by public transit.
  • Up to $255 a month in 2016 for the value of parking you provide your employee at or near your home or at or near a location from which your employee commutes to your home.

Paying Tax without Withholding

Any income tax you pay for your employee without withholding it from the employee’s wages must be included in the employee’s wages for federal income tax purposes. It is also counted as Social Security and Medicare wages and as federal unemployment (FUTA) wages.

How Do You Handle the Earned Income Credit (EIC)?

Certain workers can take the earned income tax credit (EIC) on their federal income tax return. This credit reduces their tax or allows them to receive a payment from the IRS if they do not owe tax. You may have to make advance payments of part of your household employee’s EIC along with the employee’s wages. You also may have to give your employee a notice about the EIC.

Notice about the EIC

The employee’s copy (Copy B) of IRS 2016 Form W-2, Wage and Tax Statement has a statement about the EIC on the back.

Tip: If you give your employee that copy by January 31, 2017 (as discussed under Form W-2), you do not have to give the employee any other notice about the EIC.

Otherwise, you must give your household employee a notice about the EIC only if you agree to withhold federal income tax from the employee’s wages but the income tax withholding tables show that no tax should be withheld. Even if not required, you are encouraged to give the employee a notice about the EIC if his or her 2016 wages are less than $47,955 ($53,505 married filing jointly).

If you do not give your employee Copy B of the IRS Form W-2, your notice about the EIC can be any of the following:

  • A substitute Form W-2 with the same EIC information on the back of the employee’s copy that is on Copy C of the IRS Form W-2,
  • Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC), or
  • Your own written statement with the same wording as Notice 797.

If you give your employee a substitute Form W-2 on time which lacks the required EIC information, you must give notice about the 6IC to the employee within one week of the date you gave him or her the substitute Form W-2. If Form W-2 is required, but not given on time, you must give the employee notice about 2016 EIC by January 31, 2017. If Form W-2 is not required, you must give your notice to the employee by February 7, 2017.

How do You Make Tax Payments?

When you file your 2016 federal income tax return in 2017, attach Schedule H, Household Employment Taxes. Use this Schedule, discussed further below, to figure your household employment taxes. You will add the federal employment taxes on the wages you pay to your household employee in 2016, less any advance earned income credit payments you make to the employee, to your income tax. The amount you owe with your return is due to the IRS by April 18, 2017.

Tip: You can avoid owing tax with your return if you pay enough federal income tax before you file to cover the employment taxes for your household employee, as well as your income tax. If you are employed, you can ask your employer to withhold more federal income tax from your wages in 2016. If you get a pension or annuity, you can ask for more federal income tax withholding from your benefits. Or you can make estimated tax payments for 2016 to the IRS, or increase your payments if you already make them.

Asking for More Federal Income Tax Withholding

If you are employed and want more federal income tax withheld from your wages to cover the employment taxes for your household employee, give your employer a new Form W-4, Employee’s Withholding Allowance Certificate. Complete it as before, but show the additional amount that you want withheld from each paycheck on line 6.

If you get a pension or annuity and want more federal income tax withheld to cover the employment taxes for your household employee, give the payer a new Form W-4P, Withholding Certificate for Pension or Annuity Payments (or a similar form provided by the payer). Complete it as before, but show the additional amount that you want withheld from each benefit payment on line 3.

Paying Estimated Tax

If you want to make estimated tax payments to cover the employment taxes for your household employee, get Form 1040-ES, Estimated Tax for Individuals. Use its payment vouchers to make your payments. You can pay all of the employment taxes at once or in installments. If you have already made estimated tax payments for 2016, you can increase your remaining payments to cover the employment taxes. Estimated tax payments for 2016 are due April 18, June 15, September 15, 2016, and January 17, 2017.

Payment Option for Business Employers

If you own a business as a sole proprietor or your home is on a farm operated for profit, you can choose either of two ways to pay the 2015 federal employment taxes for your household employee. You can pay them with your federal income tax as described above, or you can include them with your federal employment tax deposits or other payments for your business or farm employees.

If you pay the employment taxes for your household employee with business or farm employment taxes, you must report them with those taxes on Form 941 or Form 943 and on Form 940 (or 940-EZ).

What Forms Must You File?

You must file certain forms to report your household employee’s wages and the federal employment taxes for the employee if you pay the employee:

  1. Social Security and Medicare wages,
  2. FUTA wages, or
  3. Wages from which you withhold federal income tax.

The employment tax forms and instructions you need for 2016 will be sent to you automatically in January 2017 if you reported employment taxes for 2015 on Schedule H (Form 1040), Household Employment Taxes.

Employer Identification Number (EIN)

You must include your employer identification number (EIN) on the forms you file for your household employee. An EIN is a 9-digit number issued by the IRS and is not the same as a Social Security number.

Tip: You ordinarily will have an EIN if you previously paid taxes for employees, either as a household employer or in a business you own as a sole proprietor, or if you have a Keogh Plan. If you already have an EIN, use that number. If you do not have an EIN, get Form SS-4, Application for Employer Identification Number. The instructions for Form SS-4 explain how you can get an EIN immediately by telephone or in about four weeks if you apply by mail.

Form W-2

A separate 2016 Form W-2, Wage and Tax Statement, must be filed for each household employee to whom you pay:

  • Social Security and Medicare wages of $1,900 or more, or
  • Wages from which you withhold federal income tax.

You must complete Form W-2 and give Copies B, C, and 2 to your employee by January 31, 2017. You must send Copy A of Form W-2 with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration by January 31, 2017.

Schedule H

Use Schedule H (Form 1040), Household Employment Taxes, to report the federal employment taxes for your household employee if you pay the employee:

  1. Social Security and Medicare wages of $1,900 or more in 2016,
  2. FUTA wages, or
  3. Wages from which you withhold federal income tax.

File Schedule H with your 2016 federal income tax return by April 18, 2017. If you get an extension to file your return, the extension will also apply to your Schedule H.

If you are not required to file a 2016 tax return, you must file Schedule H by itself. See the Schedule H instructions for details.

Business Employment Tax Returns

Do not use Schedule H (Form 1040) if you choose to pay the employment taxes for your household employee with business or farm employment taxes. Instead, include the Social Security, Medicare, and withheld federal income taxes for the employee on the Forms 941, Employer’s Quarterly Federal Tax Return, that you file for your business or on Form 943, Employer’s Annual Tax Return for Agricultural Employees, that you file for your farm. Include the FUTA tax for the employee on your Form 940 (or 940-EZ), Employer’s Annual Federal Unemployment (FUTA) Tax Return.

If you report the employment taxes for your household employee on Form 941 or Form 943, file Form W-2 for the employee with the Forms W-2 and Form W-3 for your business or farm employees.

What Records Must You Keep?

Keep your copies of Schedule H or other employment tax forms you file and related Forms W-2, W-3, W-4, and W-5. You must also keep records to support the information you enter on the forms you file. If you are required to file Form W-2, you will need to keep a record of your employee’s name, address, and Social Security number.

Wage and Tax Records

On each payday you should record the date and amounts of:

  • Your employee’s cash and non-cash wages,
  • Any employee Social Security tax you withhold or agree to pay for your employee,
  • Any employee Medicare tax you withhold or agree to pay for your employee,
  • Any federal income tax you withhold,
  • Any advance EIC payments you make, and
  • Any state employment taxes you withhold.

Employee’s Social Security Number

You must keep a record of your employee’s name and Social Security number exactly as they appear on his or her Social Security card if you pay the employee:

  • Social Security and Medicare wages, or
  • Wages from which you withhold federal income tax.

You must ask for your employee’s Social Security number no later than the first day on which you pay the wages. You may wish to ask for it when you hire your employee.

An employee who does not have a Social Security number must apply for one on Form SS-5, Application for a Social Security Card. An employee who has lost his or her Social Security card or whose name is not correctly shown on the card should apply for a new card. Employees may get Form SS-5 from any Social Security Administration office or by calling l-800-772-1213.

How Long To Keep Records

Keep your employment tax records for at least four years after the due date of the return on which you report the taxes or the date the taxes were paid, whichever is later.

State Unemployment Tax Agencies

Alabama
Unemployment Office
649 Monroe St.
Montgomery, AL 36131
(866) 234-5382

Alaska
Employment Security Tax
Department of Labor and Workforce Development
PO Box 115509
Juneau, AK 99811-5509
(888) 448-3527

Arizona
Unemployment Tax – 911B
Department of Economic Security
PO Box 6028
Phoenix, AZ 85005-6028
(602) 771-6601

Arkansas
Department of Workforce Services
PO Box 2981
Little Rock, AR 72203-2981
(501) 682-2121
(855) 225-4440

California
Account Services Group, MIC-90
PO Box 942880
Sacramento, CA 94280
(888) 745-3886

Colorado
Unemployment Insurance Operations
Department of Labor and Employment
PO Box 8789
Denver, CO 80201-8789
(800) 480-8299

Connecticut
Connecticut Department of Labor
200 Folly Brook Blvd.
Wethersfield, CT 06109-1114
(860) 263-6550

Delaware
Division of Unemployment Insurance
Department of Labor
PO Box 9950
Wilmington, DE 19809-0950
(302) 761-8446

District of Columbia
Department of Employment Services
Office of Unemployment Compensation Tax Division
609 H Street, NE, 3rd Floor
Washington, DC 20001-4347
(202) 698-7550

Florida
Unemployment Compensation Services
Agency for Workforce Innovation
107 E. Madison Street MSC 229
Tallahassee, FL 32399-0180
(800) 352-3671

Georgia
Department of Labor
148 Andrew Young International Blvd., Suite 800
Atlanta, GA 30303
(404) 232-3301 (direct line for employer tax liability)

Hawaii
Department of Labor and Industrial Relations
830 Punchbowl Street, Rm. 437
Honolulu, HI 96813
(808) 586-8915

Idaho
Department of Employment
317 Main Street
Boise, ID 83735-0002
(800) 448-2977

Illinois
Department of Employment Security
33 South State Street
Chicago, IL 60603
(800) 247-4984

Indiana
Department of Workforce Development
10 North Senate Avenue
Room SE 106
Indianapolis, IN 46204-2277
(800) 437-9136

Iowa
Workforce Development
1000 East Grand Avenue
Des Moines, IA 50319-0209
(515) 281-5337 (Des Moines)
(800) 562-4692

Kansas
Department of Human Resources
401 SW Topeka Blvd.
Topeka, KS 66603-3182
(785) 296-5027

Kentucky
Division for Employment Services
PO Box 948
Frankfort, KY 40602-0948
(502) 564-2272

Louisiana
Louisiana Workforce Commission
PO Box 94094
Baton Rouge, LA 70804
(225) 342-2936

Maine
Department of Labor
PO Box 259
Augusta, ME 04332-0259
(207) 621-5120

Maryland
Department of Labor, Licensing & Regulation
1100 North Eutaw Street
Baltimore, MD 21201-2201
(800) 492-5524

Massachusetts
Division of Employment and Training
19 Staniford Street
Boston, MA 02114-2589
(617) 626-5075

Michigan
Department of Labor & Economic Growth
3024 W. Grand Boulevard
Detroit, MI 48202-6024
(313) 456-2180

Minnesota
Department of Employment & Economic Development
332 Minnesota Street
Suite E200
St. Paul, MN 55101-1351
(651) 296-6141

Mississippi
Department of Employment Security
PO Box 1699
Jackson, MS 39215-1699
(601) 321-6000

Missouri
Division of Employment Security
PO Box 59
Jefferson City, MO 65104-0059
(573) 751-3340

Montana
Unemployment Insurance Bureau
PO Box 6339
Helena, MT 59604-6339
(406) 444-3834

Nebraska
Department of Labor
550 South 16th
PO Box 94600
Lincoln, NE 68509-4600
(402) 471-9940

Nevada
Department of Employment Training and Rehabilitation
Employment Security Division
500 East Third Street
Carson City, NV 89713-0030
(775) 486-6300

New Hampshire
Department of Employment Security
45 South Fruit Street
Concord, NH 03301
(603) 228-4100

New Jersey
Department of Labor & Workforce Development
P.O. Box 110
Trenton, NJ 08625-0110
(609) 659-9045

New Mexico
Department of Workforce Solutions
401 Broadway NE
Albuquerque, NM 87103
(877) 664-6984

New York
Department of Labor
WA Harriman State Office Campus
Albany, NY 12240
(518) 457-4179

North Carolina
Department of Commerce
Employment Security Commission
PO Box 26504
Raleigh, NC 27611-6504
(919) 707-1150

North Dakota
Job Service North Dakota
PO Box 5507
Bismarck, ND 58506-5507
(701) 328-2814

Ohio
Department of Job & Family Services
PO Box 182404
Columbus, OH 43218-2404
(614) 466-2319

Oklahoma
Employment Security Commission
PO Box 52003
Oklahoma City, OK 73152-2003
(405) 557-5362

Oregon
Employment Department
875 Union Street, NE
Room 107
Salem, OR 97311-0030
(503) 947-1488

Pennsylvania
Department of Labor and Industry
7th and Forster Street
Harrisburg, PA 17121
(717) 787-5244

Puerto Rico
Department of Labor and Human Resources
PO Box 1020
San Juan, PR 00919-1020
(787) 754-5818

Rhode Island
Division of Taxation
One Capitol Hill
Providence, RI 02908
(401) 574-8700

South Carolina
Employment Security Commission
PO Box 995
Columbia, SC 29202-0995
(803) 737-2400

South Dakota
Department of Labor
PO Box 4730
Aberdeen, SD 57402-4730
(605) 626-2312

Tennessee
Department of Labor and Workforce Development
220 French Landing Drive
Nashville, TN 37243
(615) 741-2486

Texas
Workforce Commission
PO Box 149037
Austin, TX 78714
(866) 274-1722

Utah
Department of Workforce Services
PO Box 45288
140 East 300 South
Salt Lake City, UT 84145-0288
(801) 526-9235

Vermont
Department of Labor
PO Box 488
5 Green Mountain Drive
Montpelier, VT 05601-0488
(802) 828-4000

Virgin Islands
Department of Labor
2353 Kronprindsens Gade
St. Thomas, VI 00802
(340) 776-3700

Virginia
Employment Commission
PO Box 1358
703 E. Main Street
Richmond, VA 23218
(866) 832-2363

Washington
Employment Security Department
PO Box 9046
212 Maple Park Ave SE
Olympia, WA 98507
(360) 902-9500

West Virginia
Bureau of Employment Programs
PO Box 2761
112 California Avenue
Charleston, WV 25305
(304) 558-2657

Wisconsin
Department of Workforce Development
PO Box 7942
Madison, WI 53707-7942
(608) 261-6700

Wyoming
Unemployment Tax Division
PO Box 2760
100 West Midwest
Casper, WY 82601
(307) 235-3264

Household Employers Checklist

You may need to do the following things when you have a household employee: When you hire a household employee:

  • Find out if the person can legally work in the United States.
  • Find out if you need to pay state taxes.

When you pay your household employee:

  • Withhold Social Security and Medicare taxes.
  • Withhold federal income tax.
  • Make advance payments of the earned income credit.
  • Decide how you will make tax payments.
  • Keep records.

By January 31:

  • Get an employer identification number, if needed.
  • Give your employee Copies B, C, and 2 of Form W-2, Wage and Tax Statement.

By January 31:

  • Send Copy A of Form W-2 to the Social Security Administration.

By April Tax Day:

  • File Schedule H (Form 1040), Household Employment Taxes, with your tax return.
How can you properly fund your children’s education without draining your current cash flow? What should you do if they are a few years away from college and your education fund won’t be enough? How can you increase your chances of getting financial aid? What tax benefits might be available to you? This Financial Guide answers these questions.

With the costs of a college education rising every year, the keys to funding your child’s education are to plan early and invest shrewdly. However, there are steps you can take if you get a late start. Moreover, there are a number of effective techniques for increasing financial aid opportunities and reducing taxes. Here are some guidelines–geared to parents whose children are no older than elementary school age–for funding your child’s education.

Start Saving Early

We cannot emphasize enough that getting an early start is basic to funding your child’s education. The earlier you start, the more you’ll benefit from the compounding of interest.

College is expensive and proper planning can lessen the financial squeeze considerably–especially if you start when your child is young. According to the College Board, average published tuition and fees for full-time in-state students at public four-year colleges and universities increased 2.9 percent before adjusting for inflation, rising from $9,145 in 2014-15 to $9,410 in 2015-16. Average published tuition and fees at private nonprofit four-year institutions increased 3.6 percent before adjusting for inflation, rising from $31,283 in 2014-15 to $32,405 in 2015-16. Undergraduates received an average of $14,210 in financial aid in 2014-15, including $8,170 in grants from all sources, $4,800 in federal loans, $1,170 in education tax credits and deductions, and $70 in Federal Work-Study.

When should you start saving? This depends on how much you think your children’s education will cost. The best way is to start saving before they are born. The sooner you begin, the less money you will have to put away each year.

Example: Suppose you have one child, age six months, and you estimate that you’ll need $120,000 to finance his college education 18 years from now. If you start putting away money immediately, you’ll need to save $3,500 per year for 18 years (assuming an after-tax return of 7 percent). On the other hand, if you put off saving until the child is six years old, you’ll have to save almost double that amount every year for twelve years.

Another advantage of starting early is that you’ll have more flexibility when it comes to the type of investment you’ll use. You’ll be able to put at least part of your money in equities, which, although riskier in the short-run, are better able to outpace inflation than other investments after time.

Find Out How Much You’ll Need To Save

How much will your child’s education cost? It depends on whether your child attends a private or state school. For the 2014-2015 school year, the total expenses–tuition, fees, board, personal expenses, and books and supplies–for the average private college are about $42,419 per year and about $18,943 per year for the average in-state public college. However, these amounts are averages: the tuition, fees, and board for some private colleges can cost more than $60,000 per year whereas the costs for a state school can be kept under $10,000 per year. It should also be noted that in 2013-14 the average amount of aid for a full-time undergraduate student was about $14,180.

Planning Aid: Use College Search, a database of over 3,200 two-and four-year colleges, to find and select the best colleges for your child.

Planning Aid: If you’re trying to estimate future costs, you can estimate that school costs will grow by about two percentage points above the inflation rate. To be on the safe side, we suggest you assume costs will grow by at least 7 percent per year. For the most recent increases, refer to 2015 Trends in College Pricing.

Choose Your Investments

As with any investment, you should choose those that will provide you with a good return and that meet your level of risk tolerance. The ones you choose should depend on when you start your savings plan-the mix of investments if you start when your child is a toddler should be different from those used if you start when your child is age 12.

The following are often recommended as investments suitable for education funds:

Series EE Bonds are extremely safe investments.

U.S. Government Bonds are also safe investments that offer a relatively higher return. If you use zero-coupon bonds for your child’s education, you can time the receipt of the proceeds to fall in the year when you need the money. A drawback of such bonds is that a sale before their maturity date could result in a loss on the investment. Further, the accrued interest is taxable even though you don’t receive it until maturity.

CDs are safe, but usually provide a lower return than the rate of inflation. The interest is taxable.

Municipal Bonds, if they are highly rated, can provide an acceptable return from the tax-free interest if you’re in the higher income tax brackets. Zero-coupon municipals can be timed to fall due when you need the funds and are useful if you begin saving later in the child’s life.

Tip: Be sure to convert the tax-free return quoted by sellers of such bonds into an equivalent taxable return. Otherwise, the quoted return may be misleading. The formula for converting tax-free returns into taxable returns is as follows:

Divide the tax-free return by 1.00 minus your top tax rate to determine the taxable return equivalent. For example, if the return on municipal bonds is 5 percent and you are in the 30 percent tax bracket, the equivalent taxable return is 7.1 percent (5 percent divided by 70 percent).

Stocks contained in an appropriate mutual fund or portfolio can provide you with a higher yield at an acceptable risk level. Stock mutual funds can provide superior returns over the long term. Income and balanced funds can meet the investment needs of those who begin saving when the child is older.

Deferred Annuities provide you with tax deferral, but the yield may not be acceptable because of the relatively high cost of these investments. Further, amounts withdrawn before you reach age 59-1/2 may be subject to a 10 percent premature withdrawal penalty.

If You’re Caught Short

If you have insufficient savings for your child’s education when he or she is close to entering college, there are ways to generate additional funds both now and when your child is about to enter school:

  1. You can start saving as much as possible during the remaining years. However, unless your income level is high enough to support an extremely stringent savings plan, you will probably fall short of the amount you need.
  2. You can take on a part-time job. However, this will raise your income for purposes of determining whether you are eligible for certain types of student aid. In addition, your child may be able to take on part-time or summer jobs.
  3. You can tap your assets by taking out a home equity loan or a personal loan, selling assets or borrowing from a 401(k) plan.
  4. You (or your child) can apply for various types of student aid and education loans (discussed below and in Info Sources).

Tip: Sources of student aid and education loans should be exhausted before other types of loans are used, since the former make better sense financially. In some cases, however, a home equity loan can be advantageous because of the deductibility of interest.

Sources Of Financial Aid

Here is a summary of the possible sources of financial aid. The types of aid and tax implications change frequently, so consult your financial advisor for specifics when you’re approaching the time to seek financial aid.

Grants, the best type of financial aid because they do not have to be paid back, are amounts awarded by governments, schools, and other organizations. Some grants are need-based and others are not.

  • Federal Pell Grant Program. Pell grants are need-based.

Tip: Don’t assume that middle class families are ineligible for needs-based aid or loans. The assessment of whether a family qualifies as “in need” depends on the cost of the college and the size of the family.

    • State education departments may make grants available. Inquiries should be made of the state agency. Employers may provide subsidies.

 

    • Private organizations may provide scholarships. Inquiries should be made at schools.

 

    • Most schools provide aid and scholarships, both needs-based and non-needs-based.

 

  • Military scholarships are available to those who enlist in the Reserves, National Guard, or Reserve Officers Training Corps. Inquiries should be made at the branch of service.

Tip: Try negotiating with your preferred college for additional financial aid, especially if it offers less than a comparable college.

Loans may be need-based, and others are not. Here is a summary of loans:

  • Stafford loans (formerly guaranteed student loans) are federally guaranteed and subsidized low-interest loans made by local lenders and the federal government. They are needs-based for subsidized loans; however an unsubsidized version is also available.
  • Perkins loans are provided by the federal government and administered by schools. They are needs-based. Inquiries should be made at school aid offices.
  • Parent loans for undergraduate students (PLUS) and supplemental loans for students are federally guaranteed loans by local lenders to parents, not students. Inquiries should be made at college aid offices or by calling 800-333-4636.
  • Schools themselves may provide student loans. Inquiries should be made at the school.

Work-Study Programs. This is a program that is federally funded and based on the family’s financial need. The student works on-campus and receives partly subsidized pay. The receipt of work-study funds does not affect the level of “need” for purposes of need-based grants and loans.

To make a thorough investigation, you should fill out the financial aid application, which you can obtain from the school’s financial aid office. You will have to provide tax returns. The amount you are determined to be eligible for depends on your income, the size of your family, the number of family members currently attending college, and your assets.

How To Increase The Amount Of Financial Aid

Here are some strategies that may increase the amount of aid for which your family is eligible:

  1. Try to avoid putting assets in your child’s name. As a general rule, education funds should be kept in the parents’ names, since investments in a child’s name can impact negatively on aid eligibility. For example, the rules for determining financial aid decrease the amount of aid for which a child is eligible by 35 percent of assets the child owns and by 50 percent of the child’s income.

Example: If your child owns $1,000 worth of stock, the amount of aid for which he or she is eligible for is reduced by $350. On the other hand, the amount of aid is reduced by (effectively) only 5.6 percent of your assets and from 22 to 47 percent of your income.

  1. Reduce your income. Income for financial aid purposes is generally determined based upon your previous year’s income tax situation. Therefore, in the years immediately prior to and during college, try to reduce your taxable income. Some ways to do this include:
    • Defer capital gains.
    • Sell losing investments.
    • Reduce the income from your business. If you are the owner of your own business, you may be able to reduce your taxable income by taking a lower salary, deferring bonuses, etc.
    • Avoid distributions from retirement plans or IRAs in these years.
    • Pay your federal and state taxes during the year in the form of estimated payments rather than waiting until April 15 of the following year.
    • Since a portion of discretionary assets is included in the family’s expected contribution from income, reduce discretionary assets by paying off credit cards and other consumer loans.
    • Take advantage of vehicles which defer income, such as 401(k) plans, other retirement plans or annuities.
  2. Detail your financial hardships. If you have any financial hardships, let the deciding authorities know (via the statement of financial need) exactly what they are, if they are not clear on the application. The financial aid officer may be able to assist you in explaining hardships.
  3. Have your child become independent (if feasible). In this case, your income is not considered in determining how much aid your child will be eligible for. Students are considered independent if they:
    • Are at least 24 years old by the end of the year for which they are applying for aid,
    • Are veterans,
    • Have dependents other than their spouse,
    • Are wards of the court or both parents are deceased,
    • Are graduate or professional students or
    • Are married and are not claimed as dependents on their parents’ returns.

How To Reduce Taxes

As noted above, education funds should generally be kept in the parents’ names because of financial-aid considerations. However, in specific cases, it may be better to keep the investments in your child’s name since the tax rate on the income will be less than if they are held in your name. Professional advice should be sought in making this decision.

In the past, parents would invest in the child’s name in order to shift income to the lower-bracket child. However, the addition of the “kiddie tax” mostly put an end to that strategy. Now, investment income over $2,100 for 2016 (same as 2015) of children under the age of 19 (or 24 if a full-time student) is taxed at the parents’ rate. (This threshold is indexed annually for inflation.) Once the child reaches age 19, however, all income is taxed at the child’s rate. Of this $2,100, one-half probably won’t be taxed due to the availability of the standard deduction while the other half would be taxed at the child’s rate.

Note: These rules apply to unearned income. If a child has earned income, this amount is always taxed at the child’s rate. If you decide to invest in your child’s name, here are some tax strategies to consider:

  1. You can shift just enough assets to create $2,100 in taxable income to an under-19 child.
  2. You can buy U.S. Savings Bonds (in the child’s name) scheduled to mature after your child reaches age 19.
  1. You can invest in equities that pay small dividends but have a lot of potential for appreciation. The income earned when your child is under the age of 19 will be minimal, and the growth in the stocks will occur over the long term.
  2. If you own a family business, you can employ your child in the business. Earned income is not subject to the “kiddie tax,” and is deductible by the business if the child is performing a legitimate function. Additionally, if your business is a sole proprietorship and your child is under the age of 19, then he or she will not pay social security taxes on the income.

Note: The Kiddie Tax does not apply if the earned income of a student over age 18 exceeds half of the child’s living expenses. Living expenses include food, housing, clothing, medical, dental, education and other necessary costs of support. Students over 18 are considered independent from their parents if they provide more than 50 percent of their own support.

Tip: Reporting the kiddie tax on the child’s return using the required Form 8615 calls for showing the parents’ taxable income. A parent reluctant to show that item to a teenager may instead report the child’s investment income of the parent’s return, on Form 8814. But this is not allowed, and the Form 8615 route must be followed, where the child has taxable earned income, as many teenagers would.

Government and Non-Profit Agencies

How much life insurance do you need? What type is appropriate? You should review your life insurance needs each time you have a major life event.

Life Insurance Guide

Frequently Asked Questions

How much will it cost me to raise a child?

We can’t tell you exactly what your child will cost, but we can provide you with estimates. Knowing what to expect will allow you to plan for the future. Here is a breakdown of the items you’ll need, and an estimate of their costs.

Note: These estimates are for a first child. Bear in mind that second or third children will cost less than the first since you will already have purchased many of the items you need. Typically parents with 3 or more children spend 22 percent less per child than those with just two children.

Government estimates say that a middle-income family in 2013, defined as having an annual income between $61,530 and $106,540, will spend a total of $245,340 to raise a child to age 17. This figure represents a 1.7 percent increase from 2012 and does not include expenses incurred beyond the age of 18. If you include the cost of college, whether public or private, that cost goes up significantly. And, families that earn more generally can expect to spend more on their children.

According to the USDA report, Expenditures on Children by Families, 2013, annual child-rearing expenses per child for a middle-income, two-parent family ranged from $12,800 to $14,970. The age of the child accounted for the annual variations. For example, child care expenses are greater in the first 6 years of a child’s life, but transportation costs are likely to be higher when a child hits her teen years.

About 30 percent of the amount spent in the government estimates goes to cover housing expenses relating to the new member of your household. Child care and education expenses account for the second highest percent. Other costs taken into account include transportation, food, clothing, health care, and miscellaneous expenses.

Families in the urban Northeast can expect their expenses to be higher than the rest of the country, but the urban West coast does not lag far behind. However, families living in the urban South and in rural areas experience the lowest expenses.

What costs can I expect during the first year?

Here are the costs you can expect up to birth and during the first year.

  • Hospital Costs. According to the Transforming Maternity Care Partnership, in 2011, an uneventful hospital delivery, on average, in the United States cost between $10,657 (vaginal birth, no complications) and $23,923 (cesarean section birth with complications). The actual costs you pay, of course, vary depending on your health care coverage.
  • Layette. Before you bring the baby home, you’ll buy a crib, a changing table, and a swing or bouncy seat. The moderately priced versions of these three things will cost you about $1,200. You’ll also need at least one stroller that you can expect to pay about $400 for. A full-size infant car seat will cost you about $150-$200, and a full-size high chair will cost $150. Finally, you will spend several hundred dollars on washcloths, sheets, blankets, towels, undershirts, onesies, and other baby clothes. Also, think about whether you plan to use a diaper service, cloth diapers, or use disposable ones.
  • Feeding. The American Academy of Pediatrics recommends exclusively breastfeeding your baby for at least 6 months. Many women, of course, choose to breastfeed longer than that. Nursing mothers will have to invest in several good nursing bras and nursing pads (about $50) as well as a nursing pillow (about $25). If you plant to return to work after 3 months, consider investing in a hospital grade breast pump, which will run you about $400.In comparison, a year’s worth of ready-mix powder formula costs about $1,350. If you buy the ready-to-serve type of formula, the cost is, even more, running well over $2,000. You’ll also need a year’s supply of bottles, at about $90, and you’ll have to add another $40 to replace the nipples at least twice in a year.When your baby is ready for solid foods, you will also need to account for the cost of rice cereal and baby food.
  • Diapers and Gear. Diapers are another expense you need to consider. Cloth diapers are the least expensive option. Disposable diaper costs for the first year run about $850, and a diaper genie costs about $40.
  • Child Care. Child care in a day care center costs much less than a live-in nanny. A mid-priced day care center charges on average $975 per month for your infant’s care, or close to $12,000 per year.
  • Health Care. Your infant will visit the doctor about six times during his or her first year, including well-baby check-ups as well as the inevitable colds and fevers of infancy. How much you will spend for doctor visits during the first year depends on your health insurance.
  • Toys and Clothes. You’ll spend about $500 on toys and clothing during the first year.
  • Total for the First Year. Your total expenses for the first year run about $15,000-$18,000. The biggest variable is the cost of health care.

How much will I spend on my child during ages one through six?

During these years, you’ll spend about $1,000 on toys and clothes, and about $2,200 a year on food. If your child attends daycare or pre-school, add in the cost of these services. Daycare will cost you an average of $12,000 per year, while pre-school costs vary widely. Again, health care costs depend on your health coverage.

How much will I spend on my child during ages six through twelve?

This is the time when the overall expenses of child-rearing drop and families can save more. During these years, your child care expenses will drop drastically. Health care costs generally stabilize unless of course, your child begins orthodontia during this stage. Then, you’ll have to pay more.

You are likely to spend more than in the previous stage on clothing, toys, and entertainment, but your kids won’t be demanding the high-ticket clothing and other items of adolescence. The bill for food will be just slightly more than what it was in the previous stage.

On the negative side, now that your kids are in school, you’ll want to pay for all those extras that middle-class kids have: dancing and music lessons, sports participation, and so on. And, if you decide to send your kids to private school or to summer camp, these expenses will have to be added in.

How much will I spend on my child during ages thirteen through eighteen?

During this stage, you can expect your child’s food, clothing, and entertainment bill to greatly exceed what it was during the previous stage. For instance, food costs will increase as a result of growth spurts in your adolescent and clothing costs are likely to rise as well as your teen takes more of an interest in his or her appearance.

Once your teen starts driving, your auto insurance will go up. The extra cost could be anywhere from $300 to $1,000, depending on your state of residence and whether your child is a boy or girl. If you intend to buy your child a car, add this expense in as well.

How can I teach my kids good financial skills?

Once they reach school age, children should start learning rudimentary financial skills.

You might start to teach your kids in the following areas:

The Allowance. Giving your child an allowance is a good start. Whether you pay your child a quarter or one dollar to perform weekly household chores, you are instilling a work ethic and a giving them an opportunity to learn how to save and spend their money wisely. You can make suggestions to them about what they should do with it, but allow them the final say on what happens to the money. Let them see the consequences of both wise and foolish behavior with regard to money. A child who spends all of his money on the first day of the week is more likely to learn budgeting if he is not provided with extras to tide him over.

Savings and Investment. Beyond the basics of budgeting and saving, you’ll want to get your child involved in saving and investing. The easiest way to do this is to have the child open his or her own savings account. If you want your child to become familiar with investing, there are a number of child-friendly mutual funds and individual stocks available.

Taxes. Many teens today have part-time jobs. Although they might not make enough to need to file a tax return, encouraging them to fill out a practice tax form is a good way to have them participate in the process–and get them used to the idea of submitting yearly tax forms.

What kinds of household workers are covered by nanny tax rules?

Household workers include anyone who does work in or around your home such as babysitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. In addition, the worker must be your employee, which means you can control not only what work is done, but how it is done.

It does not matter whether the work is full-time or part time, or that you hired the worker through an agency. On the other hand, if only the worker can control how the work is done, the worker is not your employee, but is self-employed.

What must I do if I think my worker or worker-to-be isn’t a U.S. citizen?

It is unlawful for you to knowingly hire or continue to employ an alien who cannot legally work in the United States.

When you hire a household employee to work for you on a regular basis, he or she must complete the employee part of the Immigration and Naturalization Service (INS) Form I-9, Employment Eligibility Verification. You must verify that the employee is either a U.S. citizen or an alien who can legally work here and then complete the employer part of the form. Keep the completed form for your records.

What are my tax duties if I have a household employee?

You may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax, or you may need to do both.

  • If you pay cash wages of $1,900 or more per year to any one household employee, withhold and pay Social Security and Medicare taxes.
  • If you pay total cash wages of $1,000 or more in any calendar quarter to household employees, you must pay unemployment tax.

If I hire teenagers as babysitters or for yard work, must I withhold and pay tax for them?

When figuring whether you paid an employee $1,900 or more in 2016 to babysitters or others, you generally don’t count wages paid to an employee who is under age 18 at any time during the year.

If the employee is a student, providing household services is not considered his or her principal occupation. However, you should count these wages if providing household services is the employee’s principal occupation.

Are there ways to pay my household employee that minimize the employment tax?

Wages subject to employment tax do not include the value of food, lodging, clothing, and other non-cash items you give your household employee. However, cash you give your employee in place of these items is included in wages.

If you reimburse the amount your employee pays to commute to your home by public transit (bus, train, etc.), do not count the reimbursement (up to $255 per month in 2016) as wages.

Further, if you reimburse your employee for the cost of parking at or near a location from which your employee commutes to your home, do not count the reimbursement (up to $255 a month in 2016) as wages.

I’m not sure yet whether I’ll pay enough this year to require withholding. What should I do?

You should withhold the employee’s share of Social Security and Medicare taxes if you expect to pay your household employee Social Security and Medicare wages of $1,900 or more in 2016.

If you withhold the taxes but then actually pay the employee less than $1,900 in Social Security and Medicare wages for the year, you should repay the employee.

Okay, I’ve withheld tax on the employee and I owe the employer’s share. How do I pay these amounts?

You pay withheld taxes as part of your regular income tax obligation. You don’t deposit them periodically. If you make an error by withholding too little, you should withhold additional taxes from a later payment. If you withhold too much, you should repay the employee.

Do I have to reduce the worker’s take-home pay by the tax on that pay?

If you prefer to pay your employee’s Social Security and Medicare taxes from your own funds, you do not have to withhold them from your employee’s wages. The Social Security and Medicare taxes you pay to cover your employee’s share must be included in the employee’s wages for income tax purposes. However, they are not counted as Social Security and Medicare wages or as federal unemployment (FUTA) wages.

In what cases do I owe unemployment tax?

The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. You may owe only the FUTA tax or only the state unemployment tax, or both. To find out whether you will owe state unemployment tax, contact your state’s unemployment tax agency.

If you pay cash wages to household employees totaling $1,000 or more in any calendar quarter of 2015 or 2016, the first $7,000 of cash wages you pay to each household employee in 2016 is FUTA wages. If you pay less than $1,000 cash wages in each calendar quarter of 2016, but you had a household employee in 2015, the cash wages you pay in 2016 may still be FUTA wages. They are FUTA wages if the cash wages you paid to household employees in any calendar quarter of 2015 or 2016 totaled $1,000 or more.

Do not withhold the FUTA tax from your employee’s wages. You must pay it from your own funds.

Do I need to withhold federal income tax?

You are not required to withhold federal income tax from wages you pay a household employee. You should withhold federal income tax only if your household employee asks you to withhold it and you agree. The employee must give you a completed Form W-4, Employee’s Withholding Allowance Certificate. If you agree to withhold federal income tax, you are responsible for paying it to the IRS.

You figure federal income tax withholding on both cash and non-cash wages you pay. Measure non-cash wages by the value of the non-cash item. Do not count as wages any of the following items:

  • Meals provided at your home for your convenience.
  • Lodging provided at your home for your convenience and as a condition of employment.
  • Up to $255 a month in 2016 for bus or train tokens (passes) you give your employee, or in some cases for cash reimbursement you make for the amount your employee pays to commute to your home by public transit.
  • Up to $255 a month in 2016 to reimburse your employee for the cost of parking at or near your home or at or near a location from which your employee commutes to your home.

Any income tax you pay for your employee without withholding it from the employee’s wages must be included in the employee’s wages for federal income tax purposes. It is also counted as Social Security, Medicare and FUTA wages.

What about Earned Income Credit (EIC)? What must I do?

Certain workers can take the earned income credit (EIC) on their federal income tax return. This credit reduces their tax or allows them to receive a payment from the IRS if they do not owe tax. You must give your household employee a notice about the EIC if you agree to withhold federal income tax from the employee’s wages and the income tax withholding tables show that no tax should be withheld. Even if not required, you are encouraged to give the employee a notice about the EIC if his or her 2016 wages are less than $47,955 ($53,505 if married filing jointly).

The employee’s copy (Copy B) of the IRS 2016 Form W-2, Wage and Tax Statement has a statement about the EIC on the back. If you give your employee that copy by January 31 (as discussed under Form W-2), you do not have to give the employee any other notice about the EIC.

What federal tax forms must I file if I have a household employee?

Form W-2 and Schedule H of Form 1040. Specifically:

  • A separate Form W-2, Wage and Tax Statement, must be filed for each household employee to whom you pay Social Security and Medicare wages, or wages from which you withhold federal income tax. Give Copies B, C, and 2 to your employee by January 31, 2017, and send Copy A of Form W-2 with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration by January 31, 2017.
  • Use Schedule H (Form 1040), Household Employment Taxes, to report the federal employment taxes for your household employee if you pay the employee Social Security and Medicare wages, FUTA wages, or wages from which you withhold federal income tax.
  • File Schedule H with your federal income tax return. If you are not required to file a tax return, file Schedule H by itself.

When should I start saving for my child’s education?

This depends on how much you think your children’s education will cost. The best way is to start saving before they are born. The sooner you begin the less money you will have to put away each year.

Example: Suppose you have one child, age six months, and you estimate that you’ll need $120,000 to finance his college education 18 years from now. If you start putting away money immediately, you’ll need to save $3,500 per year for 18 years (assuming an after-tax return of 7 percent). On the other hand, if you put off saving until the child is six years old, you’ll have to save almost double that amount every year for twelve years.

Another advantage of starting early is that you’ll have more flexibility when it comes to the type of investment you’ll use. You’ll be able to put at least part of your money in equities, which, although riskier in the short-run, are better able to outpace inflation than other investments in the long-run.

How much will my child’s college education cost?

It depends on whether your child attends a private or state school. According to the College Board, average published tuition and fees for full-time in-state students at public four-year colleges and universities increased 2.9% before adjusting for inflation, rising from $9,145 in 2014-15 to $9,410 in 2015-16. Average published tuition and fees at private nonprofit four-year institutions increased 3.6% before adjusting for inflation, rising from $31,283 in 2014-15 to $32,405 in 2015-16. Undergraduates received an average of $14,210 in financial aid in 2014-15, including $8,170 in grants from all sources, $4,800 in federal loans, $1,170 in education tax credits and deductions, and $70 in Federal Work-Study.

How should I invest my child’s college fund?

As with any investment, you should choose those that will provide you with a good return and that meet your level of risk tolerance. The ones you choose should depend on when you start your savings plan-the mix of investments if you start when your child is a toddler should be different, from those used if you start when your child is age 12.

The following are often recommended as investments for education funds:

    • Series EE bonds: These are extremely safe investments. They should be held in the parents’ names. If the adjusted gross income of you and your spouse at the time of redemption is at or under the amount set by the tax law, the interest on bonds bought after January 1, 1990, is tax-free as long as it is used for tuition or other qualified education costs. If your adjusted gross income is above the threshold amount, the tax break is phased out. In 2016, the exclusion ($76,000 indexed for inflation) begins phasing out at $77,200 modified adjusted gross income and is eliminated for adjusted gross incomes of more than $92,200. For married taxpayers filing jointly, the tax exclusion begins to be reduced with a $115,750 modified adjusted gross income and is eliminated for adjusted gross incomes of more than $145,750. The exclusion is unavailable to married filing separately.
    • U.S. Government bonds: These are also investments that offer a relatively higher return than CDs or Series EE bonds. If you use zero-coupon bonds, you can time the receipt of the proceeds to fall in the year when you need the money. A drawback of such bonds is that a sale before their maturity date could result in a loss on the investment. Further, the accrued interest is taxable even though you don’t receive it until maturity.
    • Certificates of deposit: These are safe, but usually provide a lower return than the rate of inflation. The interest is taxable. These should generally only be used by the most risk averse investors and for relatively short investment horizons.
    • Municipal bonds: Assuming the bonds are highly rated, the tax-free interest on them can provide an acceptable return if you’re in the higher income tax brackets. Zero-coupon municipals can be timed to fall due when you need the funds and are useful if you begin saving later in the child’s life.

Tip: Be sure to convert the tax-free return quoted by sellers of such bonds into an equivalent taxable return. Otherwise, the quoted return may be misleading. The formula for converting tax-free returns into taxable returns is as follows:

Divide the tax-free return by 1.00 minus your top tax rate to determine the taxable return equivalent. For example, if the return on municipal bonds is 5 percent and you are in the 30 percent tax bracket, the equivalent taxable return is 7.1 percent (5 percent divided by 70 percent).

  • Stocks: An appropriate mutual fund or portfolio containing stocks can provide you with a higher yield than bonds at an acceptable risk level. Stock mutual funds can provide superior returns over the long term. Income and balanced funds can meet the investment needs of those who begin saving when the child is older.

What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit (AOC) was made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH). The maximum credit, available only for the first four years of post-secondary education, is $2,500. You can claim the credit for each eligible student you have for which the credit requirements are met.

Income limits. To claim the American Opportunity Credit, your modified adjusted gross income (MAGI) must not exceed $90,000 ($180,000 for joint filers). To claim the Lifetime Learning Credit, MAGI must not exceed $60,000 ($120,000 for joint filers). “Modified AGI” generally means your adjusted gross income. The “modifications” only come into play if you have income earned abroad.

Amount of credit. For most taxpayers, 40 percent of the AOC is a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes.

Which costs are eligible? Qualifying tuition and related expenses refer to tuition and fees, and course materials required for enrollment or attendance at an eligible education institution. They now include books, supplies, and equipment needed for a course of study whether or not the materials must be purchased from the educational institution as a condition of enrollment or attendance.

“Related” expenses do not include room and board, student activities, athletics (other than courses that are part of a degree program), insurance, equipment, transportation, or any personal, living, or family expenses. Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. For expenses paid with borrowed funds, count the expenses when they are paid, not when borrowings are repaid.

Tip: The tax law says that you can’t claim both a credit and a deduction for the same higher education costs. It also says that if you pay education costs with a tax-free scholarship, Pell grant, or employer-provided educational assistance, you cannot claim a credit for those amounts.

What is the “kiddie tax?”

In the past, parents would invest in the child’s name in order to shift income to the lower-bracket child. However, the addition of the “kiddie tax” mostly put an end to that strategy.

For taxable years beginning in 2016, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax” is $1,050 (same as 2015). The same $1,050 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax.” For example, one of the requirements for the parental election is that a child’s gross income for 2016 must be more than $1,050 but less than $10,500.

For 2016, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to “kiddie tax” is $2,100 (same as 2015).

Note: These rules apply to unearned income. If a child has earned income, this amount is always taxed at the child’s rate.

What is a Coverdell Education Savings Account – Section 530 Program (formerly Education IRA) and who is eligible for one?

In 2016, you can contribute up to $2,000 each year to a Coverdell education savings account (Section 530 program) for a child under 18. These contributions are not deductible, but they grow tax-free until withdrawn. Contributions for any year (say 2016) can be made through the (unextended) due date for the return for that year (April 18, 2017).

Note: For the $2,000 contribution limit, there is no adjustment for inflation and therefore, the limit is expected to remain at $2,000 for 2013 and beyond.

Only cash can be contributed to a Section 530 account and you cannot contribute to the account after the child reaches his or her 18th birthday.

Anyone can establish and contribute to a Section 530 account, including the child, and you may establish 530s for as many children as you wish. The child need not be a dependent. In fact, he or she need not be related to you, but the amount contributed during the year to each account cannot exceed $2,000. In 2016, the maximum contribution amount for each child is phased out for modified AGI between $190,000 and $220,000 (joint filers) and $95,000 and $110,000 (single filers).

If you have insufficient savings for your child’s education when he is close to entering college, what should you do?

Many families find themselves in the same boat. Fortunately, there are ways to generate additional funds both now and when your child is about to enter school:

  • You can start saving as much as possible during the remaining years. However, unless your income level is high enough to support an extremely stringent savings plan, you will probably fall short of the amount you need.
  • You can take on a part-time job. However, this will raise your income for purposes of determining whether you are eligible for certain types of student aid. In addition, your child may be able to take on part-time or summer jobs.
  • You can tap your assets by taking out a home equity loan or a personal loan, selling assets or borrowing from a 401(k) plan.
  • You (or your child) can apply for various types of student aid and education loans.

What types of grants are available for college?

Grants-the best type of financial aid because they do not have to be paid back — are amounts awarded by governments, schools, and other organizations. Some grants are need-based and others are not.

    • The Federal Pell Grant Program offers federal aid based on need.

Tip: Don’t assume that middle class families are ineligible for needs-based aid or loans. The assessment of whether a family qualifies as “in need” depends on the cost of the college and the size of the family.

  • State education departments may make grants available. Inquiries should be made of the state agency.
  • Employers may provide subsidies.
  • Private organizations may provide scholarships. Inquiries should be made at schools.
  • Most schools provide aid and scholarships, both needs-based and non-needs-based.
  • Military scholarships are available to those who enlist in the Reserves, National Guard, or Reserve Officers Training Corps. Inquiries should be made at the branch of service.

Tip: Try negotiating with your preferred college for additional financial aid, especially if it offers less than a comparable college.

What types of grants are available for college?

There are various student loan programs available. Some are need-based, and others are not. Here is a summary of loans:

  • Stafford loans (formerly guaranteed student loans) are federally guaranteed and subsidized low-interest loans made by local lenders and the federal government. They are needs-based for subsidized loans; however an unsubsidized version is also available.
  • Perkins loans are provided by the federal government and administered by schools. They are needs-based. Inquiries should be made at school aid offices.
  • Parent loans for undergraduate students (PLUS) and supplemental loans for students are federally guaranteed loans by local lenders to parents, not students. Inquiries should be made at college aid offices.
  • Schools themselves may provide student loans. Inquiries should be made at the school.

How can I increase the amount of financial aid my child is entitled to?

Here are some strategies that may increase the amount of aid for which your family is eligible:

    • Try to avoid putting assets in your child’s name. As a general rule, education funds should be kept in the parents’ names, since investments in a child’s name can impact negatively on aid eligibility. For example, the rules for determining financial aid decrease the amount of aid for which a child is eligible by 35 percent of assets the child owns and by 50 percent of the child’s income.

Example: If your child owns $1,000 worth of stock, the amount of aid for which he or she is eligible for is reduced by $350. On the other hand, the amount of aid is reduced by (effectively) only 5.6 percent of your assets and from 22 to 47 percent of your income.

  • Reduce your income. Income for financial aid purposes is generally determined based upon your previous year’s income tax situation. Therefore, in the years immediately prior to and during college, try to reduce your taxable income. Some ways to do this include:
    1. Defer capital gains.
    2. Sell losing investments.
    3. Reduce the income from your business. If you are the owner of your own business, you may be able to reduce your taxable income by taking a lower salary, deferring bonuses, etc.
    4. Avoid distributions from retirement plans or IRAs in these years.
    5. Pay your federal and state taxes during the year in the form of estimated payments rather than waiting until April 15 of the following year.
    6. Since a portion of discretionary assets is included in the family’s expected contribution from income, reduce discretionary assets by paying off credit cards and other consumer loans.
    7. Take advantage of vehicles which defer income, such as 401(k) plans, other retirement plans or annuities.
  • Detail any financial hardships. If you have any financial hardships, let the deciding authorities know (via the statement of financial need) exactly what they are if they are not clear from the application. The financial aid officer may be able to assist you in explaining hardships.
  • Have your child become independent. In this case, your income is not considered in determining how much aid your child will be eligible for. Students are considered independent if they:
    1. Are at least 24 years old by the end of the year for which they are applying for aid
    2. Are veterans
    3. Have dependents other than their spouse
    4. Are wards of the court or both parents are deceased
    5. Are graduate or professional students
    6. Are married and are not claimed as dependents on their parents’ returns

How can I save taxes on college savings?

If you decide to invest in your child’s name, here are some tax strategies to consider:

  • You can shift just enough assets to create $2,100 in 2016 (same as 2015) taxable income to an under-19 child.
  • You can buy U.S. Savings Bonds (in the child’s name) scheduled to mature after your child reaches age 18.
  • You can invest in equities that pay small dividends but have a lot of potential for appreciation. The dividend income earned when your child is under the age of 19 will be minimal with tax relief, and the growth in the stocks will occur over the long term.
  • If you own a family business, you can employ your child in the business. Earned income is not subject to the “kiddie tax,” and is deductible by the business if the child is performing a legitimate function. Additionally, if your business is a sole proprietorship and your child is younger than 19 years old, then he or she will not pay social security taxes on the income.
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