The Broke Professional - grow your money and yourself

Tax Savings For Having a Little One

Very few events in life can bring such joy and emotion as having a child can.  Whether it’s your first (experienced this last year) or your tenth (hope to never ever experience this), nothing can really match up to the happiness you get looking at your newborn for the first time.

And then the bills come.  First the hospital bills will slowly trickle into your mailbox.  Everyone from the anesthesiologist to the guy who changed the garbage in your hospital room needs to get paid.  Then you have to decide how to feed the kid.  If you decide to use breast milk, that can save some money but can be time intensive.  If you have to go with baby formula, prepare to shell out about 5 times the amount of money you pay for your regular grown up milk.  Hopefully you can scrounge up some secondhand clothes from family and friends, but raising a child can cost a pretty penny.

But there is a group that will come to your rescue.  The US government.  While the government isn’t usually known for swooping in to save anyone who is not a big bank, they do provide some tax relief for those who have children.  There are two big tax breaks most parents will get, and other breaks available depending on your situation.  These tax breaks won’t make having kids a bargain, but they can potentially save thousands of dollars on your tax bill every year.

Dependency Exemption.  This is one of two major tax breaks most parents will be able to get.  If you file as a single, you get one exemption.  If you file a joint return, you get two exemptions.  And you get another exemption for the year for each child you have, even if they were born on December 31.  For 2014, the exemption amount is $3,950.  So if you have one child, you get to deduct $11,850 ($3,950 times 3) from your income.  Not too shabby.

High roller couples, beware, this benefit starts phasing out with an Adjusted Gross Income (AGI) of $305,050 and is completely phased out at an AGI of $427,550.

Child Tax Credit.  Tax credits are awesome because they decrease your actual tax TOTAL and not just your taxable income.  For 2014, you get a $1,000 credit for each qualifying child.  So a family with 3 qualifying kids would get $3,000 off of their tax bill (assuming it doesn’t bring the tax bill to 0 because the credit stops there).  This credit can be a great help especially for families with lots of kids.  The credit starts phasing out at an AGI of $110,000 and is completely phased out at $130,000.

The Dependency Exemption and the Child Tax Credit are two big tax benefits that many parents will be able to qualify for.  There are other tax breaks that will apply for certain situations:

Child Care Credit.  This is a credit some can claim for child care expenses that enable the taxpayer to earn an income (like an in-home nanny).  For those with AGI’s of $15,000 or lower, they can claim a maximum of $3,000 worth of allowable expenses for one child.  The credit is 35% of the allowable expenses.  For those with an AGI of $43,000 or higher, the credit is 20% of allowable expenses.

Adoption Credit.  Adopting a child can be an honorable venture but it can get really expensive.  The government gives a pretty good tax credit in 2014 of $13,190 for adoption costs.  The credit stops once your tax bill hits 0.  The benefit phase out begins at an AGI of $197,880 and is completely phased out at $237,880.

Child Care Reimbursement Accounts.  These can vary by employer but they allow you to set aside pre-tax dollars to use for child care expenses, similar to a flex spending account for healthcare purposes.  This can be very helpful as the amount you decide to set aside avoids both state and federal income tax.

These are just a few of the great tax breaks available for having children.  Tax filing season is still a few months away, but it’s always helpful to think about these tax breaks now and do what you reasonably can to get them if you’re eligible.  And try to enjoy your kids.  They don’t stay small and cute forever.

Taxes can get tricky for certain situations, so always consult your tax professional for any specific questions.            

Student Loan Repayment is a Marathon

I’ll be running (and hopefully finishing) my first half marathon in a couple of months.  Having played sports like basketball for most of my life, I’m no stranger to tough workouts and feeling physically exhausted.  Marathon training is a little different in that it is not collapse to the floor physically draining, but it is LONG and TEDIOUS.  The workouts themselves aren’t tough individually, but the challenge lies in staying focused throughout the workouts and being able to do them consistently day after day.  This reminded me of the effort it takes to pay off my student loans as well.

Besides the fact they both can make you want to puke, there are more similarities between student loan repayment and marathon training:

Both require a plan.  Training for a half marathon can’t be done haphazardly for most mere mortals.  It helps to have a training plan a few months before the race to get your body and mind ready.  At the least you should have an idea of how many times you want to train per week and how you want to ramp up the distances you run.  Not having a plan can greatly decrease your chance of finishing a race.

The same thing is needed to pay off student loans.  You have a certain amount of debt and you want to get out of it as soon as you can.  You can’t just make random payments and hope they’ll be gone soon.  On top of making the minimum payments for all of your loans, apply anything extra to the highest interest loan to get the most bang for your buck.  This is called the Avalanche method and is the only sure fire way to pay the least amount of total interest and get out of debt sooner.  Ready for Zero is also a great program to get you on top of your debts and can even tell you the exact day you will be debt free.

Take one day at a time.  One of the more frustrating parts of running for me is the monotony of it.  I could play basketball for 10 days in a row and have a different experience each time.  But with running each day is more or less the same, especially if you use a treadmill.  But it’s really important to remember to take one day at a time and focus on making a great effort on that day.  That’s because every day of training will contribute to your success (or failure) on the day of the race.  If you give a consistent good effort on each day of training, you will most likely be able to finish the race and run well.  Each day you run well prepares your body and mind a little more for that race.  It may be tough to detect on a day to day basis, but your heart will work more efficiently and your muscles and tendons will be able to handle all that pavement pounding a little bit more.

Keeping the big picture in mind is also important when paying off student loans.  Even if it’s going to take a few years to pay off those loans, realize that some lenders want you stuck paying minimum payments for 25 years!  It’s definitely tough seeing that big balance go down slowly, but each payment you make will get you that much closer.  Since most of your payments early on will be paying a lot of interest, it seems that the principal is not going down that much.  But for every payment you make the principal goes down which means you will pay less interest on the next payment.  Each payment is definitely making a difference so it’s important not to get lackadaisical and miss some payments here and there.  As time goes on you will see that principal go down faster and faster, which will hopefully motivate you to make some more money and pay the damn thing off!

The end will be oh so sweet.  When training for a race it’s important to visualize yourself finishing the race and how good it will feel.  If any of you have trained for a race and finished it, you know what I mean.  It’s a great idea to try to bottle that feeling and go to it whenever you lose motivation or decide you want to take today’s workout a little easy.  It’s also important to celebrate your accomplishment.  Go out and get something nice to eat and relax for the rest of the day.  You’ve earned it.

I imagine making my last payment on my student loans.  There will be fireworks and fan fare and a marching band.  Or I will just click the mouse and quietly ride off into the sunset.  In either case, it will certainly be a great feeling that I can’t wait to experience.  Though it may seem far away, having a plan certainly helps because I know each months payment will get me closer and closer to that fateful day when the heavens will open up.  Keeping that day in mind keeps me going on my plan and wanting to get rid of these loans even faster.

That’s my latest installment of me finding ways to equate sports and finances.  If you just can’t get enough, check out my other posts about baseball and soccer.

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