Every year, millions of people overpay on taxes simply because they don’t know the right strategies to keep more of their hard-earned money. If you’re a parent, you might be missing out on powerful ways to save during tax season and set your child up for long-term financial success. Here’s how you can save on taxes while maximizing your child’s investment returns.
Take Advantage of Every Deduction and Credit Available
Many parents don’t realize they qualify for tax credits and deductions that could significantly reduce their tax bill. The tax code is complicated, and many people assume that deductions only apply to the wealthy or those with an accountant handling their finances. This misunderstanding leads to thousands of dollars in missed savings each year.
By understanding the credits and deductions available to you, you can legally lower your tax burden. Here are some of the most valuable tax breaks for parents:
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Child Tax Credit (CTC): This credit provides up to $2,000 per qualifying child under 17. A portion of this credit is refundable, meaning even if you owe no taxes, you could still receive a tax refund. Learn more at IRS.gov.
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Earned Income Tax Credit (EITC): If you’re a working parent with moderate to low income, you may qualify for the EITC, which can put thousands of dollars back in your pocket. Check your eligibility here.
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Child and Dependent Care Credit: If you pay for daycare, after-school programs, or even summer camp while you work, this credit could help offset the costs. See the latest IRS guidelines.
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Education Savings Deductions: Contributions to 529 college savings plans may be tax-deductible in some states, and withdrawals for education expenses are tax-free. Compare state tax benefits here.
What to Do Next: Don’t leave money on the table! Make sure you research or consult a tax professional to ensure you’re claiming every credit you qualify for.
1. Take Advantage of 529 College Savings Plans
A 529 plan is a tax-advantaged investment account specifically designed for education savings. Contributions grow tax-deferred, and withdrawals for qualified education expenses are tax-free at the federal level. Additionally, many states offer tax deductions or credits for contributions to their specific 529 plans. Some benefits include:
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Tax-Free Growth: Earnings in a 529 plan grow without being taxed, provided they are used for qualified educational expenses.
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State Tax Deductions: Over 30 states provide tax deductions or credits for 529 contributions.
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Flexibility: Funds can be used for tuition, books, and even certain K-12 expenses.
Learn more about 529 Plans on Principal
2. Leverage Custodial Accounts (UTMA/UGMA)
Custodial accounts under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) allow minors to own securities and other assets. These accounts provide:
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No Contribution Limits: Unlike some tax-advantaged accounts, there are no annual limits on contributions.
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Tax Benefits: The first $1,250 of a child’s unearned income is tax-free (2025 limits), and the next $1,250 is taxed at the child’s lower tax rate.
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Kiddie Tax Considerations: Earnings above $2,500 may be subject to the “kiddie tax,” which applies the parent’s tax rate.
3. Be Aware of the Kiddie Tax
The kiddie tax is designed to prevent parents from shifting income to their children to take advantage of lower tax rates. It applies to unearned income (e.g., dividends, interest, and capital gains) exceeding a certain threshold. For 2025:
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The first $1,250 of unearned income is tax-free.
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The next $1,250 is taxed at the child’s rate.
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Unearned income over $2,500 is taxed at the parent’s rate.
Strategies to minimize kiddie tax impact include:
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Investing in tax-efficient funds or municipal bonds.
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Keeping unearned income under the tax threshold.
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Exploring tax-advantaged accounts like Roth IRAs.
Read about the Kiddie Tax on IRS.gov
4. Open a Roth IRA for Your Child
If your child has earned income, a Roth IRA can be a powerful tax-free investment tool. Contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free. Benefits include:
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Compounding Growth: A long investment horizon allows money to grow tax-free.
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Flexible Withdrawals: Contributions (not earnings) can be withdrawn penalty-free at any time.
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Retirement Readiness: Early investing establishes lifelong financial habits.
Learn more about Roth IRAs for kids on Kiplinger
5. Gift Appreciated Assets for Tax Efficiency
Gifting stocks or other appreciated assets to a child can provide tax advantages. If the child sells the assets, they may pay capital gains tax at a lower rate than their parents. However, be mindful of the kiddie tax rules.
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Lower Tax Rate: Children in lower tax brackets may pay 0% on long-term capital gains.
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Educational Funding: Proceeds can be used for education expenses.
Explore tax-smart gifting strategies on Kiplinger
6. Consider State-Specific Tax Benefits
Some states provide additional tax benefits for investment contributions, particularly for 529 plans. Research your state’s tax policies to ensure you maximize potential deductions or credits.
Find state-specific benefits on Savingforcollege.com
Turn Everyday Expenses Into Smart Savings
Raising children is expensive, and many parents struggle to cover basic costs, let alone think about saving. What if there were ways to turn everyday expenses into tax savings?
By leveraging tax deductions and strategic planning, you can reduce your taxable income and keep more money in your pocket. Here’s how:
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Childcare Expenses: If you pay for daycare, preschool, or after-school programs so you can work, you may qualify for the Child and Dependent Care Credit, which can cover up to 35% of your childcare costs, depending on your income. More details from the IRS.
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Medical Expenses: If your family has high medical expenses, you may be able to deduct them if they exceed 7.5% of your adjusted gross income. Find out what qualifies.
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Health Savings Account (HSA) or Flexible Spending Account (FSA): These accounts allow you to use pre-tax dollars to pay for medical expenses, saving you money on taxes. Compare HSAs and FSAs.
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Employing Your Child: If you own a business, hiring your child could allow you to pay them a salary (which is deductible for your business) and contribute to their Custodial Roth IRA, setting them up for financial success while reducing your taxable income. Learn about tax rules for employing family.
What to Do Next: Go through your expenses and see where you could be saving on taxes. Keeping good records and consulting a tax professional can help you make the most of these opportunities.
Final Thoughts
By leveraging tax-advantaged accounts, understanding tax implications, and strategically gifting assets, you can maximize your child’s investment returns. Consulting with a financial advisor or tax professional can help tailor these strategies to your specific situation.
Start planning now to secure a brighter financial future for your child!
