Lynchburg Living

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By Susan S. Davidson, CPA

There is no doubt that a couple’s life is forever changed at the moment their first child is born. As author Elizabeth Stone so poignantly stated about parenthood, “It is to decide forever to have your heart go walking around outside your body.” Not only is parenting one of the most exciting and rewarding experiences in a person’s life, it is also one of the most expensive. In a report released in August 2009 entitled Expenditures on Children by Families, the U.S. Department of Agriculture detailed this surprising statistic: “…a middle-income family with a child born in 2008 can expect to spend about $221,190 for food, shelter, and other necessities to raise that child over the next 17 years.” This amount does not even include costs for a child’s college education!

With college tuition costs increasing by an average of 8 percent per year, it has become imperative, now more than ever, that parents plan ahead. Author Alan Lakein once likened planning ahead to “bringing the future into the present so that you can do something about it now.” Setting aside funds for college, taking advantage of tax incentives offered to parents, and, most importantly, preparing a simple will, are just a few ways that you can begin making an investment into your child”s future.

Section 529 College Savings Plans

According to the College Board’s 2006 report Trends in College Pricing, the average fees charged by four-year public institutions for tuition and fees increased 846 percent between 1976 and 2006. Recognizing the financial burden that these rapidly increasing costs were imposing on American families, the United States government established Section 529 College Savings Plans in 1996 to encourage families to set aside funds for the future college education of their child or other designated beneficiary. While each state offers at least one Section 529 Plan, the Commonwealth of Virginia offers four different college savings plans, only one of which, the Virginia Prepaid Education Program (VPEP), has Virginia residency requirements. One common misconception concerning Section 529 Plans is that the funds have to be used to attend a state school. The fact is, funds from these plans can be used for tuition, books, supplies, and other fees associated with enrolling in state colleges, private universities, or vocational schools all across the country. In some instances, the funds can even be used for universities outside the United States.

While it is possible to invest in Section 529 Plans of other states, there are certain tax advantages to investing in plans within your own state. Virginia offers a tax credit to its residents for contributions to one of Virginia’s Section 529 Plans of up to $4,000 per year, per plan. This limit is lifted for taxpayers over the age of 70. In addition, contributions made in excess of the $4,000 annual limit can be carried forward and deducted on future Virginia tax returns. While contributions to Section 529 Plans are not deductible on federal tax returns, the income earned on your investment is tax-deferred, and distributions from the Plan are tax-free as long as they are used to pay for the beneficiary’s qualified educational expenses. Your financial advisor should be able to direct you to the specific plan that is best for you.

Tax Advantages for Parents

Though bringing up children is expensive, there are many tax breaks offered by the federal government to lessen the financial burden on parents. As with any tax credit, certain conditions must be met in order to qualify for the deduction. First of all, taxpayers are allowed one dependent exemption for each of their qualifying children. For 2010, you are allowed to take a personal exemption of $3,650 for yourself, your spouse and each of your qualifying children or other qualifying dependents. Secondly, the Child Tax Credit allows parents to take a credit of up to $1,000 for each eligible dependent child. Since this credit is tied to income, it will be reduced or phased out for higher-income taxpayers.

Parents may also be entitled to a credit for the costs associated with having someone else care for their child while they work or while they look for work. This credit is called the Child Care Credit and is allowed for expenses paid for children until they reach the age of 13. In calculating the credit, you may include up to $3,000 for one qualifying child and up to $6,000 for two or more qualifying children. Depending on the amount of your adjusted gross income, the credit will amount to 20 to 35 percent of your qualifying expenses.

Finally, take the time to see if you qualify for the Earned Income Tax Credit (EITC). The EITC is available for low to moderate income families and is a “refundable” credit. “Refundable” means that you get the credit even if you do not owe any tax. In essence, it is the same as receiving a payment directly from the government!

Preparing a Will

No parents want to think about their child spending their future without them, but preparing for the “unthinkable” is one of the most important things parents can do for their children. By failing to prepare a will, important parental decisions–such as the allocation of your assets and the custody of your child–will be handed over for the courts to decide. A simple will allows you to appoint an executor (the person who will administer your estate), outline how your assets will be distributed, and designate the person you wish to be your child’s guardian in the event that something happens to you or your spouse. Husbands and wives should prepare separate wills. While there are many online resources available to help you prepare a will, hiring an attorney to do the job for you will make it less likely that a technical error will be made.

While it may be difficult for the sleep-deprived parents of a newborn baby to imagine, the older children get, the busier their parents become. From the early months of purchasing diapers and endless necessities, to the later years of driving to never-ending soccer practices, doctors’ visits and birthday parties, to helping with homework, nursing wounds and preparing meals, it is easy to see how parents can allow important financial decisions to take a back seat to the “tyranny of the urgent.” However, as anyone with grown children will tell you, time passes quickly.

There is no time like the present to start preparing for the milestones that seem so far away right now. While, undoubtedly, we cannot control what will happen in the future, we can most certainly do our best to prepare for its arrival. After all, as Thomas Edison once said, “It wasn’t raining when Noah built the ark.”