USNFCU-Family Zone-Winter 2002

FAMILY ZONE

Bigger Tax Breaks for Families with Children

arents in the U.S. got a big break with 2001's Economic Growth & Tax Relief Reconciliation Act. The law, which delivered the most sweeping tax changes and cuts in more than two decades, expanded tax benefits covering children from birth through college. Here's how you can take advantage of the most significant changes, with tips from tax experts.

Maximize education savings. The Education Savings Account, formerly known as the Education IRA, has a new contribution limit-$2,000. Effective January 1, 2002, the new maximum is four times the previous cap of $500. Families can also dip into both the Education Savings Account and the state-managed 529 Plan in the same year without facing any penalty taxes. That's a great boost on education savings.

What's more, money in the Education Savings Account can now be used to cover costs related to private and public kindergarten through 12th grade. That includes supplies, computers, tutoring and after-school care, as well as the college-related costs for which the program was originally intended. But you will miss out on compound growth if you use this account to pay for minor early education expenses. So resist temptation and find another way to buy that computer, says David R. Reiser, co-author of J.K. Lasser Pro WealthBuilding.

Save when you pay for college. Money you withdraw from a 529 Plan to pay for college expenses will be fully exempt from federal income taxes if you don't use any other government programs in the same year. That could save you thousands of dollars over time. One strategy would be to use money from a 529 Plan during the student's junior or senior year of college, after you've exhausted other IRS credits. This strategy will require comparing the financial advantages of 529 Plans with IRS credits. You may want help determining this, so be sure to consult with a financial adviser on this and other matters before making your decision. You should be prepared for far more complicated tax returns in the years you make withdrawals to pay for college, notes Joseph Hurley, a Pittsford, New York-based CPA and founder of www.savingforcollege.com.

Get credit for your children. Parents with children under 17 (and with adjusted gross incomes of less than $110,000 for married couples, $75,000 for single parents) are eligible for the child tax credit. This benefit is used to offset owed taxes as much as $600 in 2001. By 2010 the credit will gradually rise to $1,000. Families who adopt a child will get a tax credit of up to $10,000 for adoption-related expenses. And starting in 2003 parents can deduct $3,000 in dependent care expenses for one qualifying dependent-up from $2,400. The cap on deductions for two or more dependents will rise to $6,000 in 2003-up from $4,800. And that's a lot to cheer about.

New Baby Checklist
Key financial tips for expectant parents

Your budget might work well for you now, but you'll have to adjust it for a new baby. Rethink your plan now so you're ready when the big day arrives.
Make sure you check with your employer about your maternity leave benefits. Often, you can negotiate your terms depending on your situation-but do it early. The sooner you tell your employer you're pregnant, the better.
Review your health insurance for hospital costs. Are prenatal, labor and delivery fees covered?
Don't forget to get a Social Security Number for your new baby. You'll need it if you want to start any accounts in his or her name and claim the child as a dependent on your taxes. Most hospitals supply forms right in the maternity ward.
Remember to call your health insurance and life insurance providers and add your new baby to your policy. With life insurance, if you do this within 30 days of your baby's birth, the beneficiary coverage is effective immediately.
If you plan to return to work, review your childcare options. Do you want a nanny? Daycare? You should choose what makes you feel most at ease and what works best with your budget.
Open a savings account in your baby's name. Even if you put just a little bit in every once in a while, any kind of savings will help in the long run. Your child will thank you for it later.

Get in the Savings Habit!
Start an Education Savings Account today.

aking charge of your family's financial future is easy once you get into the habit. The savings habit, that is. And Navy Federal makes it easy for you to get started. With as little as $5 you can establish membership and a regular share savings or Education Savings Account for your child. Our deposit accounts are federally insured and pay dividends on all funds in the account, not just those over a certain amount.

To save regularly, sign up for Direct Deposit. Many people like this out-of-sight, out-of-mind method of automatically sending a set amount into savings before they are tempted to spend it. To sign up for Direct Deposit, simply provide your payroll office with Navy Federal's Routing/ Transit Number, 2560-7497-4, and your child's account number.

To give your savings a boost, once the balance in the savings account reaches $250 or more, be sure to upgrade it to a certificate with a higher dividend rate.