Saturday, October 25, 2014

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Little Bundles Of Joy Bring Big Bundles Of Tax Cuts

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Children can help reduce their parents' and guardians' taxes from cradle to college. NY1's Money Matters reporter Tara Lynn Wagner filed the following report.

Congratulations, new parents! That tiny baby just opened the door to a variety of new tax deductions. To begin with, there's the dependent exemption, $3,800 a head. For a family of four, that's $15,200 off one's taxable income.

Depending on their income, parents may also be entitled to the child tax credit.

IRS spokeswoman Dianne Besunder says the credit "is for your children who are your dependents up to age 17 and that can be worth $1,000 per dependent."

Those who pay someone to watch their kids during the day may be eligible for the Child and Dependent Care Credit. This can be the tuition paid to a licensed day care facility or money spent to hire someone to watch children at home, provided the person is paid legally.

"They have to be on payroll and you pay payroll taxes for them and then you get a credit," says Ellen Minkow, a certified public accountant and partner at MS 1040.

Helpful grandparents or illegal nannies do not qualify. The credit is capped at $3,000 for one child or $6,000 for two or more children.

Some day those children may go to college, and those credits may qualify for a tax credit.

Students enrolled in the first four years of college may be eligible for the American Opportunity Credit, worth up to $2,500. There is also the Lifetime Learning Credit, which is up to $2,000 for those enrolled in graduate school or continuing education, adults included.

Taxpayers cannot claim both credits for the same student in the same year and both credits are subject to income limitations. If those limits are exceeded the taxpayer may still be able to claim a tuition and fees deduction.

"Those are a deduction. They are not as valuable as a credit but you might not qualify for the other two," says Besunder.

Finally, that future college education may save taxpayers money now if they invest in a 529. While it will not reduce federal taxes, a 529 may reduce taxable income with the state.

"I love the 529s and I tell anybody when they first give birth, open a 529," Minkow says. "Each person can put in $5,000, so if you are married that's $10,000 that's coming off your state taxes right at the top."

For more on the various tax credits and deductions, visit ClientIP:, UserAgent: CCBot/2.0 ( Profile: TWCSAMLSP