children

September 19 2018

School your children on money matters

Teaching your child about money and finances is easiest when you start early. Here’s a quick review of what you should teach your children at each age if you want them to become financially competent adults:

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Preschool

Identify coins and bills, and learn what each is worth.
Understand that you can’t buy everything (choices are necessary).
Save money in a piggy bank.

Grade school

Read price tags, and learn comparison-shopping.
Do money arithmetic (make change).
Manage an allowance, and use it to pay for some purchases.
Open a savings account and learn about interest.
Participate in family financial discussions about major purchases, vacation choices, etc.

High school

Work to earn money.
Budget for larger purchases.
Learn to use a checking account.
Learn about investing — stocks, mutual funds, CDs, IRAs, etc.
Share in financial planning (and saving) for college.

College

Learn about borrowing money (interest, default, etc.).
Use credit cards judiciously.
Participate in family estate planning discussions.

Knowing about money – how to earn it, use it, invest it and share it — is a critical life skill. It’s never too early to start teaching your children about financial matters.

Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and Twitter.

September 5 2018

Protect your young children through estate planning

Image courtesy of Giordano, DelCollo at https://gdwlawfirm.com/will-estate-planning/

While many people find estate planning important, those with small children may find it especially critical. An estate plan can be a helpful planning tool to ensure your children are protected in the event that something happens to you. You may use your estate plan to appoint guardians for your minor children, as well as provide for their financial well-being. This may include designating beneficiaries for retirement accounts.

July 16 2018

The Kiddie Tax

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The term “kiddie tax” was introduced by the Tax Reform Act of 1986. The IRS introduced this rule to keep parents from shifting their investment income to their children and have this income taxed at their child’s lower tax rate. The law requires a child’s unearned income (generally dividends, interest, and capital gains) above a certain amount ($2,100 in 2017) to be taxed at their parent’s tax rate. Here is what you need to know.

Who it applies to

•Children under the age of 19
•Children under the age of 24 if a full-time student and providing less than ½ of their own financial support
•Children with unearned income above $2,100

Who/What it does NOT apply to

•Earned income (wages and self-employed income from things like babysitting or paper routes).
•Children that are over age 18 and have earnings providing more than ½ of their support.
•Older children married and filing jointly
•Children over age 19 that are not full-time students
•Gifts received by your child during the year

How it works

•The first $1,050 of unearned income is generally tax-free
•The next $1,050 of unearned income is taxed at the child’s (usually lower) tax rate
•The excess over $2,100 is taxed at the parent’s rate either on the parent’s tax return (Form 8814) or on the child’s tax return (Form 8615)

What to know/do now

1.Maximize your low tax investment options. Look to generate gains on your child’s investment accounts to maximize the use of your child’s kiddie tax threshold each year. You could consider selling stocks to capture your child’s investment gains and then buy the stock back later to establish a higher cost basis.

2.Be careful where you report a child’s unearned income. Don’t automatically add your child’s unearned income to your tax return. It might inadvertently raise your taxes in surprising ways by exposing more income to the Alternative Minimum Tax or reducing your tax benefits in other programs like the American Opportunity Credit.

3.Leverage gifts. If your children are not maximizing their tax-free investment income each year consider gifting funds to allow for unearned income up to the kiddie tax thresholds. Just be careful, as these assets can have an impact on a child’s financial aid when approaching college age years.

Properly managed, the “kiddie tax” rules can be used to your advantage. But if not properly managed, this part of the tax code can create an unwelcome surprise at tax time.

June 20 2018

Parents, Children, and Taxes

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Being a parent brings tremendous rewards, but also the challenge and responsibility of supporting and educating your child. Fortunately, the tax code has many ways to help ease a parent’s financial burden. Here’s an overview of the many ways that taxes can affect your decisions as a parent.

Exemptions and credits

Being a parent usually cuts your tax bill in at least two ways. You can generally claim a dependency exemption for each child under age 19, or under age 24 for full-time students. You can also claim a child tax credit for each child under age 17. This is a direct credit against taxes you owe, and it can be partially refundable.

Other credits include the adoption credit to offset expenses of adoption and the child care credit. This credit allows you to offset some of the costs of paying for child care so that both spouses can work or attend school full-time. Many of these tax breaks phase out for those at higher income levels.

Education expenses

One of the biggest challenges for a parent is funding a child’s college education. A variety of tax breaks can help with this major expense, including savings plans, tax credits, and tax deductions. These measures all have different rules and eligibility requirements.

There are two main types of savings plans for education expenses: Coverdell education savings accounts and Section 529 plans. Coverdell accounts work rather like an IRA. Contributions grow tax-free, and withdrawals are free of tax if used for qualified education expenses. Coverdell accounts can also be used to pay for K-12 expenses as well as college costs. Section 529 plans provide tax-free earnings and distributions for higher education expenses, and they generally have fewer restrictions than Coverdell accounts.

The American Opportunity credit and the Lifetime Learning Credit are two tax credits available for education expenses. Each has its own rules and income limits, and you cannot use both credits for the same child in the same year.

A limited tax deduction is available for student loan interest expense. In addition, interest on U.S. savings bonds can be tax-free if the bonds are used for education expenses.

Child tax issues

The “kiddie tax” is a rule that affects the investment income of children. A child’s unearned income above a threshold amount will be taxed at the parent’s highest rate until the child reaches a certain age. The intent is to stop a high-income parent from shifting large amounts of earnings to a child in a lower tax bracket.

A strategy of “income shifting” can make sense for a family once the child is old enough to escape the kiddie tax. Parents can gift income-earning assets to older children (subject to the annual and lifetime gift limits), and the children will pay tax on the income earned at their own (presumably lower) rates.

Another tax-cutting strategy is to employ your child in the family business. The business can take a deduction for wages paid, while the child often pays little or no taxes on his or her earnings. It must be a real job, though, and the wages must be reasonable for the work.

If your children have earnings from summer or after-school jobs, encourage them to open IRA accounts. The additional years of tax-free compounding can produce huge additional savings by the time your children reach retirement age.

Don’t overlook the role of grandparents. They can help pay college expenses, for example, either by contributing to education savings plans or by paying tuition bills directly. Also, by giving appreciated stock to their grandchildren, they may be able to boost the children’s savings while reducing overall taxes for the family unit.

Estate planning

For a parent, estate planning is especially important. The first priority is to make sure your children are protected in the event that something happens to you. Your estate plan should appoint guardians for your minor children, as well as provide for their financial well-being.

Early estate planning can also help to ensure that your assets pass to your children as you consider prudent. A variety of planning techniques can allow you to transfer assets to your children over the years, often while still leaving you with some control over the assets.

April 27 2018

3 reasons why your child should (or shouldn’t) have life insurance

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When determining whether or not to carry life insurance on your children, you’ll find that people have a variety of opinions. Here’s a look at some of the most common considerations for and against life insurance policies on children:

Financial security. Traditionally, you take out life insurance to provide for the financial security of dependents. The policy should include funds to replace the insured’s income and to pay off debts. Neither of these reasons applies to young children. They don’t generally have any significant income, and they don’t usually have any debts. Some parents might want to carry a modest amount of insurance to cover funeral costs for their children in case the unthinkable happens.

Insurability. Some people believe that by taking out a policy at a young age, it helps guarantee insurability as the child grows older. This could be important if the child develops a major illness later in life. The problem is that if the child does develop a serious illness, insurance will still become very expensive or limited.

Insurance as an investment. Some advisors suggest that parents should take out a whole life policy on their children. These policies include a savings component to build up cash value in the policy. You could then use that value for education expenses or other needs. But others say that there are cheaper and more efficient ways to save than by using life insurance. For example, putting money into a tax-advantaged 529 education savings plan is often a better way to save for school tuition costs.

Although a majority of advisors may argue against life insurance for children, there may be some situations where people find it makes sense. However, you shouldn’t take out a policy just because it is offered to you or because others are doing it. Make sure to do your homework and know exactly why you need the insurance.

April 3 2014

Do you need life insurance on your children

Ask whether you should carry life insurance on your children and you’ll receive a variety of answers. Here’s a look at the arguments for and against.

* Financial security. Traditionally, you take out life insurance to provide for the financial security of dependents. The policy should provide funds to replace the insured’s income and to pay off debts. Neither of these reasons applies to young children. They don’t generally have any significant income, and they don’t usually have any debts. Some parents might want to carry a modest amount of insurance to cover funeral costs for their children in case the unthinkable happens.

* Insurability. Another argument is that by taking out a policy at a young age, you help to guarantee insurability as the child grows older. This could be important if the child develops a major illness later in life. The problem is that if the child does develop a serious illness, insurance could then become very expensive or limited in amount.

* Insurance as an investment. Some advisors suggest that parents should take out a whole life policy on their children. These policies include a savings component to build up cash value in the policy. You could then use that value for education expenses or other needs. But others say that there are cheaper and more efficient ways to save than by using life insurance. For example, putting money into a tax-advantaged Section 529 plan might be a better way to save for college tuition costs.

* The bottom line. Although a majority of financial advisors might argue against life insurance for children, there may be some situations when it makes sense. One thing is clear. You shouldn’t take out a policy just because it is offered to you or because others are doing it. Insure your kids only if you’ve done your homework and know exactly why you need the insurance.

Please contact our office if you’d like help reviewing the advantages and disadvantages as they apply to your particular situation.

Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in the McLean and Tysons Corner, VA. Gilliland & Associates specializes known for our superior knowledge and aggressive interpretation and application of tax laws, we help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+ <https://plus.google.com/108764776146415485651/posts> , LinkedIn <http://www.linkedin.com/in/gillilandcpa> , Facebook <https://www.facebook.com/gillilandcpa> , and Twitter <https://twitter.com/dnggcpa>

October 1 2013

Guide your children to financial maturity

Teaching your children about money and finances is easiest when you start early. Here’s a quick review of what you should teach your children at each age if you want them to become financially competent adults.

Preschool – Skills to Teach

* Identify coins and bills; learn what each is worth.

* Understand that you can’t buy everything; choices are necessary.

* Save money in a piggy bank.
Grade School – Skills to Teach

* Read price tags; learn comparison shopping.

* Do money arithmetic; make change.

* Manage an allowance; use it to pay for some of child’s own purchases.

* Open a savings account and learn about interest.

* Participate in family financial discussions about major purchases, vacation choices, etc.
Teens – Skills to Teach

* Work to earn money.

* Budget for larger purchases.

* Learn to use a checking account.

* Learn about investing – stocks, mutual funds, CDs, IRAs, etc.

* Share in financial planning (and saving) for college.
College/Young Adult – Skills to Teach

* Learn about borrowing money (interest, default, etc.).

* Use credit card judiciously.

* Participate in family estate planning discussions.
Knowing about money – how to earn it, use it, invest it, and share it – is a critical life skill. It’s never too early to start teaching your children about financial matters.

Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in the McLean and Tysons Corner, VA. Gilliland & Associates specializes known for our superior knowledge and aggressive interpretation and application of tax laws, we help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+ , LinkedIn , Facebook, and Twitter.

November 20 2012

Decide when to pay tax on U.S. savings bonds

When you own Series EE or Series I savings bonds, you have a tax decision to make. Both types of bonds earn interest monthly. Usually, you’ll choose to defer paying any taxes on the interest until the bond reaches final maturity or you redeem it, whichever comes first. At that time, you would report and pay taxes on the total interest earned over the life of the bond. (If you meet certain requirements, you might avoid paying any taxes by using the bond proceeds to pay for higher education expenses.)

The alternative method is to report the interest earned each year as part of your taxable income. Most people choose the first method because it lets you delay paying taxes for as long as possible. But sometimes the annual method makes sense — for example, if a young child has been given a savings bond in his or her own name.

The tax rate on investment earnings of a child under age 19 (under age 24 for full-time students) is the parent’s marginal rate when the “kiddie tax” applies. The kiddie tax is intended to stop parents from shifting income to their children. But even under the kiddie tax rules, the first $950 of a child’s investment income in 2012 is tax-free and the next $950 is taxed at your child’s lower tax rates. So if your child expects to earn less than $1,900 from savings bonds and other investments, reporting the interest as income each year could make good tax sense.

For further details on this and other tax-saving strategies, please give us a call.

January 24 2012

Do your children need to file a 2011 tax return?

Check your children’s need to file a 2011 tax return. A return is needed if wages exceeded $5,800, the child had self-employment income over $400, or investment income exceeded $950. If the child had both wages and investment income, other thresholds apply. Contact us for any filing assistance you may need.

April 5 2011

Your child may have to file a return

Your child may have to file a 2010 income tax return. Generally, a return is required if the child had wages of more than $5,700, self-employment earnings over $400, or investment income (such as dividends, interest, and capital gains) over $950. If your child had both earned and investment income, other thresholds apply. Also, if your child is due a refund, a return must be filed to get it. Contact us if you need more information or filing assistance.