7 tax planning strategies you should consider as a parent

You need all the tax advice you can get as a parent. Every dollar saved is more money for medical expenses, college, and everything else. 

That doesn't mean you have to throw out everything you know. You can still use tax planning strategies for individuals, like keeping track of deductible expenses.

When you have a family, you have even more opportunities for reducing taxes. Before filling out your tax return for this year, check out these seven tax tips just for parents like you.

1. Utilize child tax credits

The child tax credit (CTC) offers tax savings to eligible parents. You can reduce your tax liabilities by up to $2,000 per eligible child if you qualify. 

The CTC is nonrefundable, meaning you won't get the difference back as a refund if you owe less than the credit. That said, some families qualify for the Additional Child Tax Credit (ACTC), which makes a portion of the CTC refundable.

The IRS will check your eligibility when you file. Just complete the required information about your children and household, and you're good to go. 

2. Invest in a 529 college savings plan

A 529 college savings plan helps you save money for a child's education. It's technically an investment account, meaning your deposits go toward investing in assets like stocks and mutual funds. When those investments grow, they add to your savings.

The main tax advantages of the 529 plan are:

• You don't have to pay taxes on account-generated interest

• There's no withdrawal tax if you use the money for the beneficiary's qualified education expenses.

A 529 plan takes after-tax contributions, meaning you've already paid income taxes on those earnings. The federal government doesn't offer additional benefits, but some tax deductions are available at the state level. Those benefits are available only to in-state savers, but you don’t have to limit yourself to your state’s plans.

3. Contribute to a child's Roth IRA

Your child starts working toward Social Security as soon as they start earning. Did you know you can also open a Roth Individual Retirement Account (IRA) for them? As long as the account holder has some earned income, there's no age limit. 

The only restriction is that if the account holder is under 18, an adult has to set it up as a custodial account. Contributions must come from the child’s earned income — and chores don’t count. However, if the parents own a business, they may add their child to the payroll and generate eligible wages.

Alternatively, you can withdraw from a Roth IRA to pay for college. You don't have to pay early withdrawal penalties for education expenses. You'll only pay income taxes on withdrawals from investment earnings, not the amount deposited.

4. Claim dependent care credits

You can claim a dependent care credit if you've paid someone to watch someone in your care while you work — or look for work. That someone might be a child under 13 or a dependent of any age who can't care for themselves. That person must live with you for at least half the year.

The credit amount depends on your financial situation and how much you paid for dependent care. You can check your eligibility on the IRS website.

5. Leverage education tax credits

The IRS offers two education-based tax credit programs — the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). You may qualify if you pay post-secondary tuition for yourself, a child, or a dependent. 

The AOTC offers up to $2,500 for each of the first four years of college or university studies. The LLC is worth up to $2,000 per return and can apply to any student working toward a degree, certificate, or job skill.

You may apply for both tax credits on the same return, but they must be for different students and expenses.

6. Gift assets wisely

Estate tax planning strategies aren't just for the wealthy. People in any tax bracket can benefit from gifting non-cash assets — stocks, real estate, government bonds, and so on.

Take gifted stocks, for example. If you give your child $100 in stock shares, they might earn money on those stocks for years. There's no capital gains tax until they cash out and earn a profit. And if the stock does go down in value, they can deduct capital losses.

Capital gains tax is a tax on profits from investments. If you sell a stock, you pay taxes on your earnings. But if you give it to someone, you only pay taxes if the value exceeds the IRS limit.

As of 2024, you can gift up to $18,000 worth of stocks per year per recipient without paying a gift tax. 

7. Consider a family limited partnership (FLP)

If you run a family business or have significant family assets, consider forming a family limited partnership (FLP).

An FLP is where family and business tax planning strategies come together. It creates a separate legal entity that can own assets. Family members can invest assets into the partnership like they'd invest in a business.

An FLP usually has senior family members — parents or grandparents — as general partners. They're responsible for the funds and can distribute shares to other family members. Those shares can grow like stocks if the partnership gains income.

An FLP is a valuable way of building your nest egg as a family, but the rules can get complicated. Consult a financial planner or attorney if you're interested in starting one.

Build a tax-smart financial future for your family

As a financially savvy parent, you know your tax situation affects your kids' future. You also understand that it's even more important to share what you learn so they understand tax management as adults.

With Level Up by Greenlight, your kids can build their confidence and money smarts, learning the answers to questions like "What are taxes?" and "How do investments work?" Together with your money smarts and guidance, it's one way you can prepare them for a bright financial future.

Try Level Up with your kids today. You might learn something, too!