$1,200 — that equals 20% of $6,000.
Flexible savings accounts. “The dependent care credit is in addition to the child tax credit, which is available to many families,” says Crystal Alford-Cooper, a certified financial planner with Law & Associates, in Glen Echo, Maryland, and an affiliate with Raymond James Financial. “Extra savings might be available if you or your spouse can participate in an employer’s flexible savings account (FSA) that covers dependent care.”
Up to $5,000 can be contributed to an FSA and used for dependent care expenses, tax-free. As long as your tax bracket is 25% or higher (over $58,100 in taxable income on a joint return this year), you’re better off using an FSA to pay for childcare.
Suppose you spend $7,000 on day camp. The first $5,000 can be paid from an FSA. If you’re in a 25% tax bracket, you’d save $1,250, or 25% of $5,000. “Using $5,000 from the FSA reduces the amount you can use for the dependent care credit from $6,000 to $1,000,” says Fulbright. So your dependent care credit would save you another $200, or 20% of $1,000. Now your total tax savings would be $1,450 ($1,200 plus $200), which might be enough to buy all the clothes and gear your kids need for their sessions at camp.
Extra Tax Breaks For Entrepreneurs
Children also figure in mid-year tax planning for Andre DeBose, 45, and his wife, Claudia, 40, of Fairfax Station, Virginia. Andre, a management consultant, has a vending machine business on the side, while Claudia heads a multicultural books reseller at www.colorfulworld.com.
“We both pay our two sons to work for us,” says Claudia. “They work throughout the year but especially during the summer when they’re out of school. Although they’re only 14 and 12, there are things they can do, such as stocking machines, packing orders, and so on. We keep records of the work they do and pay them a reasonable amount for those jobs.”
Listed below are other tax advantages and benefits that entrepreneurs should be mindful of for next year’s filing:
Income shifting. As a result, the family can enjoy tax savings. “Money you pay as compensation is fully deductible at rates up to 35%,” says Bernie Kent, a CPA and partner at PricewaterhouseCoopers in Detroit. “Your child or grandchild can earn up to $4,850 in 2004 without owing any federal income tax. That number, which is equal to the standard deduction for single taxpayers, moves up annually to keep pace with inflation.”
Say you hire your teenaged daughter to help with your business this summer and she earns $2,000. If you’re in a 35% tax bracket, you cut your federal income tax by $700 this year (35% times $2,000), while your daughter won’t owe any tax. Your family will be ahead. Moreover, the benefits can go beyond tax savings.
“In many relatively affluent families,” says Hall, “the children may not realize the sacrifices the parents have made to achieve that level of success. My own children have worked for me, and I recommend the same