Despite the media frenzy each year about tax cuts and increases, truth be told, not much has changed for most middle-class women. So what’s a financially savvy gal to do? Take advantage of every tax break you possibly can! Read on to learn how to save on taxes in your retirement accounts, education planning, and tax credits for children. For more great ideas, order the booklet “150 Ways to Save Taxes During Life’s Transitions.”
According to the US Department of Labor, 39% of female workers are covered by private pension plans, compared with 46% of male workers. And when retirement time comes, 32% of female retirees get pension benefits, compared with 55% of men.
Add to that the sad fact that a woman still earns only 76 for every dollar a man earns and the conclusion is obvious: we’re just going to have to handle this ourselves. How? Contribute, contribute, contribute!
Fortunately, the IRS has made it easier to build a successful retirement stash. Each year the deductible amount you can contribute to a retirement account is increased for inflation, and there are catch-up contributions for those 50 or over. But the IRS can’t save for you — the rest is up to you.
Women face a double whammy when saving for our children’s education. How can you pay for the $100 sneakers now and still set aside enough money to pay the freight for junior’s dorm room?
Section 529 plans allow taxpayers to set aside money to grow tax-deferred, which can be taken out tax-free (!) to pay educational expenses. This means that your money grows without taxation every year, and you don’t pay taxes when it comes out, either.
Parents, grandparents, or anyone else who meets the applicable income restrictions may also contribute up to $2,000 per child per year to a Coverdell Education Savings Account (ESA). Children can also contribute to their own accounts. And these accounts can be used to pay for private elementary and secondary school expenses as well as college expenses.
There’s hope — the Hope Credit, that is. It amounts to 100% of the first $1,100 of a college student’s annual tuition and fees (no room and board costs) plus 50% of the next $1,100. So the maximum credit is $1,650 per qualifying student per year. Unfortunately, the Hope Credit can be claimed for only two tax years for any one student and it is allowed only when the student carries at least half of a full-time load for at least one academic period during the year.
The Lifetime Learning Credit is less restrictive. This credit is available for an unlimited number of years and without any requirement to carry a certain course load. You can also get credit for graduate courses and non-degree courses, such as professional training seminars and courses to update your computer skills. The credit is 20% of tuition and fees up to $10,000, for a maximum annual credit of $2,000. Both credits are phased out if your income is high..
Eligible taxpayers can also deduct up to $4,000 in education expenses “above the line” (meaning you need not itemize to get the break), subject to income limitations
By the way, if you are considering going back to school yourself, keep in mind that your employer can reimburse your tuition for up to $5,250 tax-free. Graduate school courses will be covered in addition to undergraduate courses.
Tax Breaks for Your Kids
First off, there’s the $1000 tax credit for each qualifying child, in addition to each dependent’s personal exemption. Don’t forget to take this credit-it’s like receiving $1000 tax-free in your pocket, as long as your income doesn’t exceed the limitations.
The child and dependent care credit will cover up to $3,000 of qualifying expenses if you pay a babysitter or day care center so you can work or go to school. If you have two or more qualifying dependents, you can claim the credit for up to $6,000 of expenses. For all but very low-income taxpayers, the new rules translate into a maximum $1,050 annual credit for one qualifying dependent, or $2,100 for two or more dependents.
If you have your own business, you can employ your kids at a fair-market wage and deduct your payments to them-which more than you can say for an allowance! You can also allow them to get started on their own savings by setting up IRAs for them for $4,000 per year or up to their earned income, whichever is less.
We women are savvy and resourceful. Using the tax strategies above can help next year’s April be a little bit sweeter than this year.
You’ll find many other helpful tax tips in the booklet
150 Ways to Save Taxes Through Life’s Transitions.