Another tax day!? Oy Vey

Another important tax day has come and gone without any fanfare and I bet no one reading this knows what day I’m referring too.  June 15, the day your second quarterly estimated payment is due.  Although most of us who are employed and receive a W-2 at the end of the year don’t have to worry about making these payments, it is still good to understand because situations can change very quickly and you don’t want to get hit with a penalty for failure to pay.

As I’ve mentioned before, our tax system is pay as you go which is why we have taxes withheld from our paychecks.  But there are many reasons why people need to file these estimated payments throughout the year and you may be one without even realizing it.

 Quarterly estimated tax payments are due four times during the year, on April 15, June 15, September 15, and January 15.  The basic concept behind these payments is that if you will owe $5,000 in taxes at the end of the year, the govt. wants you to pay them in installments.  Everyone, including the govt., knows it is easier to pay $1,250 every four months than have to come up with $5,000 at once. 

Here are the most common reasons why you may owe estimated payments.

1.  Self-employed – Since there are no taxes withheld, estimated payments must be paid.
2.  W-2 employee has too little withheld from each paycheck.
3.  Tipped employees, such as waiters/waitresses, bartenders, and bus boys (and girls!) – It is a very common practice for restaurant owners to only withhold taxes based on your hourly wage (which is almost non-existent).  But the tips you declare are also taxable and therefore you may come up short at the end of the year.
4.  Significant investment income, such as dividends and interest.
5.  Alimony
6.  Winning prizes/awards – depending on the amount/value of the prize, this may trigger the need for estimated payments.

As we get older and our financial situations evolve and become more complicated, it is important to understand the tax consequences.  It is not very pleasant to learn at the end of the year you owe taxes and penalties in one lump sum when you could have been paying in small increments throughout the year.

Planning Is How You Win The Game Of Taxes

Another tax season has come to a close and our attention can now fully turn to 2011.  Most people don’t realize that in order to win the game of taxes, you have to plan throughout the year and take necessary actions before April of the following year when it’s too late.

Many people have relatively simple tax situations and end up with a big refund each year.  But as you read here last year, getting that big refund each year is like flushing money down the toilet.  Since the US tax system is pay-as-you-go, what happens when something happens during the year that has major tax implications that will result in you owing money?  That’s right, Uncle Sam will come knocking on your door demanding payment immediately.  And he won’t care that for the last 10 years you’ve gotten refunds and this year was an exception.

Here are some unexpected situations that can lead to a big tax bill at the end of the year:

·         Winning a big prize (lottery, car, game show, etc…)
·         Court settlement
·         Big pay raise/bonus
·         Cancelled credit card debt
·         Getting a home makeover on a T.V. show
·         Early distribution from IRA or 401(k)
·         Divorce
·         Self employed income

 

Depending on the amounts involved, the tax consequences can be quite serious and leave you in serious jeopardy.  Here are a few actual situations that happened to clients I worked with (names have been changed).  Sarah and Mark had $30,000 in credit card debt and had only been able to make the minimum payments each month.  They made a deal with the bank to pay off $10,000 and the rest would be forgiven.  In order to get that money, Sarah took it out of her IRA.  This type of withdrawal carries a 10% penalty, which in this case is $1,000.  Additionally, they owed taxes on the $20,000 cancellation of debt.  They were in the 28% tax bracket, so this added $5,600 to their tax liability.  Sarah and Mark were like most Americans and they normally received an average refund of approximately $3,000.  After taking into account their new taxes, they now owed $3,600.  Although this may be better than owing $30,000 to a credit card company, this $3,600 check had to be paid immediately.

My second example is for the self employed.  Joe was an attorney who lost his job in 2009 and in 2010 decided to start his own law firm.  Business was better than expected and he ended up making $35,000.  Unfortunately for Joe, he never paid any taxes on any of his earnings.  Unlike employees who have taxes taken out of every paycheck, the self-employed are responsible for sending quarterly payments directly to the IRS.  Joe was in the 25% tax bracket and ended up owing almost $13,000 in taxes, plus penalties for owing so much!

Example 3:  Steve made his first three quarterly payments of $5,000 in 2010.  He believed that he qualified for the first time homebuyer credit of $8,000 and thought this could substitute for his fourth quarterly payment so he decided not to make his last payment.  In the meantime, a company he owned 1,000 shares of stock in was purchased and he ended up making $50 per share.  If you can’t do the math, that’s $50,000 dollars profit that needs to be reported as income.  When it was time to complete his taxes, he found out that stock transaction put him over a threshold and he didn’t qualify for the homebuyer credit.  The stock transaction qualified as a long term capital gain at a rate of 15%.  Steve owed $7,500 for the stock trade plus $8,000 he should have made as an estimated payment for a total of $15,500.

All three of these examples show the importance of planning for taxes before making any decisions, and since most of us don’t understand income taxes we should talk with a tax professional to make sure we are making an informed decision.  Income taxes are a pay-as-you-go system and when something major happens and you don’t account for it, you can get stuck with a very large tax bill at the end of the year.  It might be better to think of taxes as a game we are all playing, because the best way to win any game is to plan ahead and make adjustments when necessary.

Why Cut Expenses When You Can Earn More

In these tough economic times many of us were forced to reevaluate our lifestyle and monthly expenses because we feared losing, or actually lost, our jobs. Everywhere I turned people were saying the same things, “I’ve cut back on this and we’ve stopped doing that”. And each time all I heard was the same thing, “My family and I can’t do the things we really like to do all in the name of saving a few bucks”. This is even what Personal Financial Planners will tell you to do. Cut, cut, cut. But cutting expenses can only go so far. Using this philosophy may eventually lead you to living in a dark house with no TV, internet, or food! I propose the exact opposite philosophy: make more money.

If you’re going to cut expenses, deciding which expenses to cut can be an ongoing, daily decision making process that creates stress, guilt, and can even damage personal relationships. Imagine you’ve been buying a coffee every morning on your way to work for five years and now you have to tell yourself you can only get one every other day. What do you do the other two days? And how do you feel when you slip up and buy one when you’re not supposed to? You will probably feel guilty, or like you’ve failed. These feelings will be amplified since they are on top of all the other daily stresses you already have. On the other hand, creating a new stream of income is highly rewarding and can lead to a higher standard of living or even a new career.

Consider these two individuals, Tom and Jim, both of whom are looking for an extra $200 per month. Tom will get his by cutting expenses whereas Jim will earn his by creating a new revenue stream. Here is the breakdown:

Tom
Cable bill            $50
Daily lattes           25
Nightlife                75
Eating out             50

Jim
New revenue stream   $200

Tom is going to cut his cable bill down to the basic package and eliminate all the extra premium channels he enjoys. He will then only buy three lattes a week instead of five, go out with his friends two fewer times a month, and eat out two fewer times. Unfortunately for Tom, he will have to make one of these decisions every single day each month. Should today be the day I skip that latte? Or should I skip guy’s night out this weekend? What if he skips that latte on the same day as guy’s night? What stressful and unfulfilling days Tom will have if he has to constantly make decisions on what to cut from his life!

Jim, on the other hand, only has to figure out how to earn an extra $200 each month. He knows that everyone has a skill which someone else will pay for, so he does some self reflection and research and decides which of his skills to put to work. Maybe he is good at woodworking, or he’s a great speaker, or even painting. He then spends one hour a day creating a side business that will bring in $200 a month. If his skill is worth only $20/hr, then all he has to do is work 2.5 hours each weekend (or 10 hours per month) to meet his goal. He didn’t have to give anything up and in fact, he has a more rewarding and fulfilling life.

I am not saying you shouldn’t try to cut your expenses at all, but try not to cut things you really enjoy. The goal is to cut unnecessary expenses that you consider a waste of money. For example, let’s say your cable bill each month is $100 and you receive every channel offered including sports packages, movie channels, etc… If you notice that you are only watching the basic channels, then switching to a cheaper package that only costs $50 per month will save you $600 per year and you won’t even notice since you never watched the premium channels anyways.

Some people respond to my rationale by saying they have nothing to offer that people will pay for. The reality is we all have a skill that someone else is willing to pay us for. In fact, every day we pay other people to do things we could easily do ourselves. That coffee I talked about earlier could easily be made at home for a fraction of the cost. Or what about paying to have our car oil changed or someone to walk the dog? These are things we can do ourselves but choose to pay someone else because it is more efficient. You may say, “I pay someone else to change my car oil because I don’t know how to”. Yes, that is probably true, but how long would it take to learn?

Many people every day are using their skills to make extra money. Are you able to type extremely fast? Maybe you’re good at bookkeeping. There are many companies looking for people to work from home doing these type of things and most are flexible enough that you can work at night or whenever is convenient for you.

Choosing to make more money will maintain, and probably improve, your standard of living. No more having to decide which expenses are most important to you. Now the decision will be how to spend that extra money you’ve made.

5 Tips For 2011

How would you rate 2010? I give it 10 out of 10. My daughter turned two, my wife is pregnant with child number two, and I am extremely happy at my job. Additionally, my wife and I purchased our first home in a great neighborhood and love coming home to it every day. I can only hope that 2011 is just as great, if not better, than 2010.

And as January 1st approaches I would like to remind everyone to think about their tax situation for the year ahead. Will you be earning a bigger paycheck this year? Will you be able to itemize your deductions on your 2011 tax return? Are you planning on buying a house or starting a business? Are you getting married or having kids in 2011? These are just a few of the important questions you need to ask yourself in order to properly plan for the upcoming tax year. I’ve said it before and I’ll say it again: Getting a refund at the end of the year is like flushing money down the toilet. Ideally, you will owe nothing, and get nothing. Break even. It always amazes me how many people think this is foolish. They want bigger and bigger refunds each year and never realize the money they are missing out on.

The following are the 5 most important things to do at the beginning of 2011 to make sure you get the most out of 2011.

1. Fill out a new W-4: This is how your employer knows how much to withhold from your paycheck. If you are having too much taken out in 2010 you need to fill out a new one to reduce your withholdings. This basically means your paycheck will be higher!

2. Review major plans in 2011: Are you getting married? Having a child? Is a child graduating from college? Major events or changes can lead to big tax consequences/rewards so it is important to plan for them.

3. Decide if you need help filing your taxes: Not understanding the tax code can cost you a significant amount of money. Missed deductions and credits can be the difference between a small refund and owing thousands of dollars. And don’t think TurboTax or one of the other do-it-yourself software will make sure you file correctly. I’ve used a number of these products and each time there are errors that would have cost me hundreds of dollars. Taxes are extremely complex and only a tax professional (CPA, tax attorney, or enrolled agent) will get you the biggest savings.

4. Get organized: Many people start to prepare their taxes only to find they didn’t keep very good records or they can’t find important documents. Start a file labeled “2011 Taxes” and place anything and everything related to taxes in that folder. Make copies if you have too. If the IRS audits your tax return, you will need proof to back up any income or deductions. And believe me, the IRS agent won’t care what your situation is: no proof=no deduction.

5. Create an action plan: Whether it means paying off debt or achieving that big promotion at work, everyone needs a plan. More importantly, write your plans and goals on paper (with actual paper and pen!). Goals are more likely to be achieved when they are written down and the paper and pen method makes it as real as possible. Make sure you review your action plan on a regular basis to make sure you are following it or need to adjust it.

Be sure to consult a tax professional if you are unsure of what the tax consequences are of any changes to your situation.

Ease the Holiday hangover

In just a couple of more days we will once again take part in the annual ritual of saying goodbye to the current year and ringing in a new year with various festivities. Some of us will go out and party like rock stars while others will look forward to having a relaxing evening with the kids and being in bed by 11pm. As someone who just turned 30 and has a two year old and a pregnant wife, mine will be the latter.

With every new year comes the resolutions that fizzle by the middle of January and the credit card statements that arrive in the mail reminding you how much you actually spent during the holidays. If this year is no different than last, then you’ll probably start praying for that big tax refund to pay off all your debts. But as I explained in my post about big refunds, you might as well be flushing that money down the toilet. Here are five simple ways to recover from your holiday hangover and start 2011 off on the right foot.

1. Pick up extra hours at work
Depending on the type of job, you might be able to work some extra hours and even earn overtime pay. Working does two things to ensure an easy transition to the new year. First, it allows you to earn some extra money to put straight towards your credit cards or into savings, and second, it prevents you from spending even more money because you’re busy working.

2. Use savings to pay off debt
Savings accounts these days earn an average of less than 1% while credit cards can charge up to 30%! If you can’t pay off your cards in full using your weekly salary, what’s the point of having anything in savings? Use the money in your savings account to avoid unnecessary finance charges and build your savings back using weekly income.

3. Transfer balances to existing card offering 0%
If paying off your debt in full is not possible then think hopefully you qualify for a balance transfer offering little to zero interest. I receive offers almost daily for 0% for 12-15 months with the small fee of 4%. Depending on how much debt you have and the interest rate being charged, 4% may only equal two or three months of interest. That would still leave you with nine months of interest free time to pay off the card. Just be careful not to miss a payment or max out your card as these conditions can lead to rates being jacked up over 30%.

4. Remove all but one credit card from your wallet/purse
Most people carry 3 – 5 credit cards with them in their wallets giving them the ability to buy whatever they want whenever they want. At the beginning of 2011, when so many of us will feel the money pinch, it will be all too easy to just reach into our wallets and purses and pull out any credit card to use. If you only carry one card you will be less likely to use it.

5. Create a monthly budget
This is a no-brainer yet most people refuse to make one. For one reason or another people decide they “know” where their money goes and how much they need and then fall into the credit card trap. Budgets need to be created to keep us on track and prevent us from overspending. They are incredibly easy to make and can help save us a fortune in interest fees. If you need help making a budget send me an email at daniel.bresnick@gmail.com.

New Years is a time for celebration and shouldn’t be cause for stress over money. If you plan carefully you can ring in the new year worry free and start 2011 off right.

The Financial Liberator Returns

Welcome to November and the holiday season and the triumphant return of The Financial Liberator. It’s been a long four months since my last post and a lot has changed over that time. In June I was laid off after just having purchased my first house, and I explained that I had a few leads because of the connections I had made over the years. One of them turned into a job and I couldn’t be happier with my new situation. My commute is now only 10 minutes (vs. 45), the corporate culture is much more “me”, and the position is better suited to career advancement. And speaking of career advancement, I passed the final part of the CPA exam in August and will officially become a Certified Public Accountant in February 2012 (I still need 15 more months of experience but I’m not counting).

There is also one big piece of news on the family front, and that is my wife and I are expecting our second child. We are both overjoyed and ecstatic about the new addition to our family and know we will face many new challenges, both emotionally and financially. So as I move forward with this column, you can expect to hear more about dealing with increasing children on a not-so-increasing income.

Shrink your bills

In my first post back I’m going to explore a new website I came across called www.billshrink.com. This is a very easy to use site that claims you will “start saving money in under a minute”. The idea is that you choose what category you need to save money in and they will find alternatives for you. The current categories are wireless phones, television, credit cards, savings and CD’s, and gas stations. For example, if you want to find an alternative for your wireless service, it will ask you for basic information about how you use your current cell phone and what carrier you are with. It will then find other carriers that match your usage style and give you prices on phones and plans.

The two best categories are credit cards and gas stations. If you are in the market for a new credit card, this site will search the internet for cards with the best rates and rewards. Different people will find different uses for this based on how you use credit each month. If you pay your bill in full every month, you might be looking for a rewards card without caring what the interest rate is. Or maybe you have a big balance and you want a balance transfer offering 0%. Finding a new card that fits your needs is quick and painless with this website.

Finding the cheapest gas station is also very easy as you only need to enter your address and it searches nearby gas stations for price information. It will also tell you how much it will cost just to get there. My concern with this tool is that it gets its information from GasBuddy and OPIS (Oil Price Information Service) and the true up-to-the-minute price of gas is not always accurate. But it’s a fun site to play around with to see if you're paying too much for gas.

Conclusion

Overall, this is a fun site to play around with whether or not you are in the market for one of these services. If you are like me and spend a lot of time on the internet, you may know of better websites to find this information (i.e. Bankrate.com for credit cards and savings accounts) so please share them below.

Why Your Big Tax Refund Is Like Flushing Money Down The Toilet

Every year between January and April it seems everyone gets excited about a big tax refund they expect to receive. This has always baffled me. Is it because I don’t like money? Or maybe it’s because I don’t like to see other people have money. The real reason is because tax refunds are interest free loans made to the government and wouldn’t that money be better off in your pocket?

The average tax refund for 2009 was $3,036, which means tax payers could have had an extra $253 a month if they had proper tax planning. Some people may not think this is a big deal, but let’s look at how much money we would have if we invested that money each month. At the end of each month we invest the $253 into a Roth IRA which will grow tax free. At the end of year one, we’ll have $4,801, or an extra $1,765. If we continue this over a ten year period, you would have $32,421,928! Seriously. Now, if you waited until the end of the year to get your $3,036 tax refund and then invested that at the same rate as above for ten years, you would only have $43,981.

I realize that this scenario might seem ridiculous because our tax situations change and we may not be able to invest all of the money each month for ten or more years. But don’t you want to try? You could be a multimillionaire in just ten years!

I said in the title to this post that a big tax refund is like flushing money down the toilet. The money down the toilet is the interest not being earned. A very simple solution to this is to fill out a new W-4 at work and change the number of allowances. This form has instructions that can walk you through how many allowances you should claim (the more you claim, the less money taken out of your paycheck), but often times you will still get a big refund at the end of the year because the calculations don’t take into account tax credits and deductions. The best bet is to consult a tax professional who can help save you the most amount of money by planning for every available credit and deduction.

Here is the other big reason I hear why people love their big refunds: “It’s a forced saving plan which keeps me from spending it on things I don’t need”. As I’ve shown above, it’s not a very good savings plan. And let’s all be honest for a second, how much of our refund goes into savings? We all want that money to go into savings, but most of it ends up in the hands of retailers. This is why I advise people to automatically invest part of their paycheck in their Roth IRA or other savings vehicle. You’ll never see that money and therefore won’t miss it, and if you put it into your Roth, it will grow tax free. I’ll tell you why a Roth IRA is so great in a later post.

So after reading this, I want you to go into work tomorrow and fill out a new W-4 and see if you can’t lower how much tax is taken out of your paycheck. Just compare how many allowances you currently have with what the new W-4 calculates (to find how many allowances you currently have just look at your current paycheck). More importantly, talk to a tax professional who will be able to help lower your yearend tax liability and save you even more.

Being Laid Off: The unthinkable happened

I hear everyday how the economy is getting better and because the GDP has officially reached positive territory we've moved out of the Great Recession. This is great news unless you were just laid off. And I was just laid off.

After years of hard work and putting my wife through lonely late nights and weekends while I bartended, I finally started my accounting career. And in a field that is supposed to be recession proof, there was no worries about me being laid off. So we purchased a house, had central air and a brand new garage door installed, and did a small kitchen remodel.

And then I get laid off for lack of work.

So many thoughts immediately run through my head, but one of the loudest is screaming, "Is my house going to get foreclosed upon after only one mortgage payment!?". After crunching the numbers we will be able to survive.

Only hours after being laid off I started contacting members of my network and received two solid leads. If one of these two positions turns into a job, I might actually turn on a profit on this stretch of unemployment. That's because I was paid all my vacation time as well as severance until the end of the month (vacation time actually covers the first half of July). So if I am lucky enough to start working before then, I'll end up making money (but I'll be happy just to get a job!).

Should my unemployment continue beyond July 15, the financial cutbacks would have to officially begin. Even with the emergency fund we have, I would probably have to put both of my private student loans into forbearance, which means the interest would keep accruing and I would have the option of paying it off each month or capitalizing it. This decision and whether or not to pay it off is a topic for another day.

At this point, I am extremely optimistic of my chances of landing a job before months end so I'll leave you with this thought: No one is safe from cutbacks or layoffs so everyone needs a six month emergency fund in case the unthinkable happens to you. In times of deep recession it should even be 9-12 months. Each month represents total monthly expenses without having to cutback on your accustomed lifestyle. It's never too early to start saving for an emergency, whether unemployment, medical, or natural disaster, that most of us will find ourselves in at some time in our lives.

Public vs. Private School

I live in an area where everyone seems to be alumni of a private high school. As someone who grew up in an area that was just the opposite this is alarming to me. I have always heard that private school was very expensive and I always wondered if children’s’ privatized brains were much smarter. I have a one year old daughter and want her to grow into the brightest, smartest girl possible, so should I be thinking about saving for her education?

Let’s take a look at how private schools match up to public schools.

Cost

The average annual tuition of a private high school education is $8,549 according to the National Center for Education Statistics. This includes both religious and nonsectarian schools. This means a privately funded high school education costs almost $35,000! Now here is the kicker: Since public education is funded primarily through property taxes, you’re also paying a full tuition to public school.

You may be screaming that it’s worth it, that the high cost will equate to a better college which will lead to a better job which will lead to curing cancer! Maybe it will, but since no one has yet to cure cancer, do you really want to sacrifice your financial future to find out?

Public schools educate 88% of the children in America, 2% are home schooled, and I would like to argue that there is no way that the other 10% who attend private school are the only ones growing up to become doctors and lawyers and CEO’s. And let’s remember, public schools are free! The only cost is from taxes which you pay anyways.

Education

You may still be saying private schools are worth it because public education is dismal at best. This may be true in many parts of the country so a closer look at each jurisdiction is needed to make the decision of whether or not to pay for private education. For example, the county where I grew up is one of the wealthiest in the country and yet almost everyone attended public school. This is because the wealth paid for a premier public education system, whereas if you live in a very poor area there is no money to pay for schooling. So assuming all things being equal that private schools do not educate children any better or worse than public schools, we find a catch 22: If my jurisdiction is wealthy and pays for a great schooling system, why pay for private school? And if I live in a poor area then how could I possibly afford a private education? Here is a statistic that reiterates my point: 80% of children who come from families with annual incomes of $100,000 or more attend public schools.

But how about standardized scoring comparing the two schools? Do private schools score better on these tests? On the SAT’s, private school students score an average of 75 points better than public school students. One explanation is that private schools have more access to SAT prep courses. Anyone who has ever taken the SAT’s knows that it isn’t entirely about how smart we are. The other explanation is that private school children are smarter, but I think 75 points falls into the test taking ability category.

External Factors

A few days ago my wife and I were talking about whether or not private school was worth the cost and a couple of factors were mentioned that might outweigh both cost and education: religious aspect and safety (safety from drugs, the “wrong crowds”, violence, etc...). In 2008 81% of private school students attended a religiously-affiliated school. For the extreme cost savings, why can’t parents just send their kids to Sunday school like my parents did?

The other reason why parents wish to send their kids to private school is to protect them from the evils of public school lifestyle. Depending on the area you live, your neighborhoods may be violent, drug laden black holes that suck children away forever into gangs and jail and cemeteries. Of course that is one extreme, but what if that’s where you live? I bet those public schools aren’t very successful. If I lived there I would sacrifice everything to send my child to a private school to get away and have a chance at a better life. So ultimately there is much more to think about than just dollar cost and quality of education.

Financial Gains

At this point, assume for a second that the decision is based solely on dollar cost. As I mentioned earlier, the average cost of a private school is $8,549 per year, or almost $35,000 for high school. Now what if you took that $8,549 and invested it each year earning an average 8% return? After four years you would have close to $50,000. That’s an impressive gain in such a short amount of time. For most of us that would equal a one year emergency fund which, over the past couple of years, we’ve all learned how important it is to have given current economic conditions. Now think about how much it would cost to send your child to 12 years of private school vs. how much you would have if you invested it. The numbers are staggering.

Conclusion

As I said before, there are many factors to consider when deciding on public vs. private schooling such as cost, quality of education, and religious aspect. Some will be more important than others but at the end of the day, I urge everyone to also think about what is financially sound for the family and consider the consequences of paying such a high price for education.

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How Our Children Can Save Us Taxes

Have you ever wanted to reduce the amount of tax you owe to the government? I certainly wish I didn’t have to pay any taxes, but the reality is that most of us are making enough money where we do have to pay taxes. Although the IRS will always try and get a piece of our income, there will always be ways to hide it from them. Today I want to share a few of the ways that those of us who have children, or will have children in the near future, can benefit from using our children to help lower our tax bills.

The first way our children can help us save taxes is by transferring investments into their name. The IRS allows children under 18 to have unearned income up to $950 without having to pay any taxes. The next $950 will only be taxed at the lowest tax rate, which is 10%. Anything over this threshold will be taxed at the parents’ rate, which can be 15% - 35%. Unearned income is usually from interest and dividends, but can be anything where you don’t actually “work” for the money. So the goal here is to transfer up to $1,900 into your child’s name. That can be as much as $570 in tax savings, and having your children report income (even at your higher rate) can produce other tax savings. Most of the tax credits and deductions that exist have income limits, so the lower we can get our income, the more credits/deductions we are eligible for.

A perfect example of this is from a family friend who has student loans. Up to $2,500 of student loan interest can be deducted from income if your modified adjusted gross income (MAGI) is below $70,000 ($145,000 married filing jointly). Their MAGI was $148,000 and they couldn’t take the deduction. If they had $3,000 transferred into their daughters’ name, they would have qualified for the deduction and ended up saving $39 in tax. And they might have even qualified for other deductions or credits to save even more money.

Another great way to save on taxes is to hire your children in the family business. Your goal here is to have wages paid to the children reduce the business’ income and therefore reduce the tax owed. This does of course have to be legitimate. You have to own a business and the child has to do actual work, so this probably wouldn’t work with a very young child (unless you own a modeling agency) but it is perfect for teenagers.

For the working parents among us, many employers offer reimbursement accounts for such things as child care and health savings. These accounts allow the employee to deposit parts of their paycheck tax free and then be reimbursed. What’s nice about these accounts is that your taxable income is lower and therefore less tax needs to be withheld from each paycheck. Here is how it works in relation to my family. My wife elects to have a daycare expense account through her employer and chooses to have the maximum withheld over the course of the year, which is $5,000. Each paycheck she receives will have approximately $192 taken out and placed in the account, tax free. When she submits her receipt for paying our daycare, she is reimbursed for that expense. The tax savings lies in the fact that at the end of the year she has $5,000 less in taxable income, which will save us about $1,250 in tax.

Reimbursement accounts are a great way to reduce your income tax if you are spending the money anyways. We already pay to have our kids in daycare and most kids, depending on their age, are seeing the doctor many times a year. These costs can all be paid into a reimbursement account. As mentioned above, a health spending account works exactly the same way, only the expenses are for health related goods and services (i.e. prescriptions, doctor visits, over the counter drugs, etc...). Since there are certain rules and restrictions it is important to talk to a tax professional to see how you can get the most savings come tax time.

Now, since the summer officially kicks off this Memorial Day weekend, I want to mention how we can deduct summer camp expense on our taxes. We already know we can deduct child care expenses, but did you know summer camps can be included? As long as your child is under the age of 13, attends a day camp, and the camp is to allow parents to work, then this expense can also be deducted as a child care expense. Paying for camp never seemed so fun!

There are other ways to reduce your tax liability through your children and these are just the most overlooked in my opinion. Taking a few minutes out of your day to set up one of these scenarios for yourself will save you a great deal over the years.

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