WSJ Your Money Briefing - How Parents Can Maximize Their Tax Refund

Episode Date: February 28, 2025

Congress has added various breaks and credits for parents throughout the tax code. Wall Street Journal reporter Ashlea Ebeling joins host Ariana Aspuru to discuss what parents should know about where to look for them and how to compare benefits before filing their taxes. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Want to own part of the company that makes your favorite burger? Now you can. With partial shares from TD Direct Investing, you can own less than one full share, so expensive stocks are within reach. Learn more at td.com slash partial shares. TD. Ready for you. Here's your money briefing for Friday, February 28th. I'm Mariana Aspuru for The Wall Street Journal. February 28th. I'm Mariana Aspuru for The Wall Street Journal. Congress has sprinkled in some breaks throughout the tax code to help counter the rising cost of raising a child, like the child tax credits.

You list your child on your return, you'll see the amount you get it depends on the amount of income you have. So it's up to $2,000 for children under 17 and up to $500 per child for children 17 and older who are dependents. We'll talk to Wall Street Journal reporter, Ashlea Ebling, about what parents need to know before filing their taxes. After the break. Taxes are due for most filers in just under two months, on April 15th. And if you're a parent, there are some often overlooked credits and breaks to consider before you file. Wall Street Journal reporter Ashley Ebling joins me. Ashley, what do parents need to know?

Congress has basically sprinkled all these tax breaks for parents throughout the tax code. So some of the things will be automatic, but the first time you're filing with a newborn, you'll need the child's social security number. And that's super important that each digit is accurate, because that's one of these, like, common mistakes that messes up returns, and you get return rejects from the IRS. If your child has investment income, you're going to need 1099 forms. If you're paying for education expenses for the children or for child care expenses, you're going to need various forms proving what those expenses are.

And one of the main benefits for parents are the child tax credits. How can they get the most out of these credits? Those are pretty much automatic when you file and you list your child on your return. You'll see the amount you get, it depends on the amount of income you have. So it's up to $2,000 for children under 17 and up to $500 per child for children 17 and older who are dependents. That could be like a college student where you're paying for most of their expenses or a child with disability.

COLLEEN O'BRIEN And child care costs can also add up. What are some tax breaks that parents can use to help ease this financial burden? So that's a really big thing. For children under 13, they're flexible spending accounts. Those are employer-sponsored accounts that allow workers to set aside pre-tax dollars to pay for unreimbursed expenses.

You can use those for daycare, child care, after-school programs, summer day camp. So it's super big employee benefit. The contribution limit for those is usually $5,000 per family per year. And then separately there's a dependent care tax credit where you can get 20% of up to $3,000 of eligible expenses or $6,000 if you have two or more kids. Can you double dip? So you can't double dip, but you could if you have enough expenses, which plenty of people do, then you might be able to use some of your employer account money and then still

have money left over that you would claim the credit for. And so both of those, the flexible spending accounts and the dependent care tax credit apply for children under 13. And those limits, are they per child? The flexible spending account is per family. The dependent care credit changes depending on the number of children you have. The topic of 529 funds come up a lot when we talk about financing your child's future because they are these tax-free college savings plans.

For someone who contributes to a 529 account, what rules should they be aware of? These accounts are really another gift from Congress, basically, because you can put money in and there's tax-free growth of your assets. And if you withdraw the money to pay for college tuition and some other things, you take it out tax free. So some states also offer state income tax breaks for contributing. So that's another tax benefit on top of it. Is there a cap on how much you can contribute to these accounts? So there's no federal cap, but the state plans themselves might have a cap that you can't go over $200,000 or something.

And on the federal side, you can put in for 2025 up to $19,000 per child for that calendar year and above that you'd have to file a federal gift tax return if you're making some ginormous gift. The thought behind it is that you pay throughout the child's life and when they have to go to college, you can go ahead and withdraw from this account. What are the tax rules on withdrawing from these? So withdrawing is super easy. You just request a withdrawal from the account provider.

And a lot of people like to literally just pay the school directly. So there's no question this is going to a qualified purpose. And the withdrawals are generally federal and state tax-free. But then Congress has also expanded what's eligible for tax-free withdrawals, and they have this new rule where you can take up to $10,000 per student per year for K-12 tuition for private school. And some costs for apprenticeships are allowed also. The tricky thing there is you'd have to double-check with your state because some states don't follow the federal rules on that. What other tax breaks are available to students and their parents?

So once the students are in college, there's the American Opportunity Tax Credit. That's up to $2,500 a year that applies to tuition. It does not apply to room and board. There's another tax credit called the Lifetime Learning Credit, and that's less generous. It does not apply to room and board. There's another tax credit called the lifetime learning credit, and that's less generous. It's up to $2,000 per return per year, but it applies to, like, a broader range of expenses, including continuing education and job skills classes. And what about anyone who is currently

incurring student loan interest? You can deduct up to $2,500 of it each year. Note, though, all three of those, the student loan interest and the two tax credits, have income limits. Speaking of income, as children get older and they start getting their side jobs, their part-time, their full-time job,

they start earning income. How does that change their parents' tax return? So that can change their parents' tax return? So that can change the parents' tax return if the child has unearned income from investments. It can be taxed at the parents' marginal income tax rate. It's called the kiddie tax. It's super complicated. But basically, you could say it often applies to the child's investment income above $2,600. That number goes up a little bit every year for inflation. At what point does your child have to file their own income tax return? If they have unearned income of more than $1,300, they would have to file their own

return. Another scenario would be if they have earned income of more than $14,600 or if they have self-employment income of more than $400. Another really common case where a dependent child has to file a return is if they have self-employment income of more than $400. Another really common case where a dependent child has to file a return is if they had a summer job and they had taxes withheld, but they didn't need to withhold that much in taxes because their income was so low.

So then they have to file a return just to get the refund for the taxes that were withheld. That's WSD Reporter, Ashleigh Ebling. And that's it for your money briefing. Tomorrow we'll have our weekly markets wrap up What's News in Markets. And then we'll be back on Monday. This episode was produced by Zoe Kolkin. I'm your host Arianna Aspuru. Jessica Fenton and Michael Laval wrote our theme music. Our supervising producer is Melanie Roy. Aisha Al Mouslim is our development producer. Scott Salloway and Chris Sinzley are our deputy editors.

And Falana Patterson is the Wall Street Journal's head of news audio. Thanks for listening. Thanks for watching!