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If you have young children to raise and educate, the 2001 tax law can benefit you

The 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA) is best known for the rebate checks distributed earlier this year. However, it has also changed many aspects of our federal tax rules and regulations. For example, if you are a parent with younger children, here are some additional features that could benefit you.

The child tax credit, previously set at $500, will increase over the next decade. Starting in 2001, eligible parents can claim $600 in tax credit for each dependent under age 17. That number will gradually rise in the following years, topping out at $1,000 in 2010.

The child-care credit for work-related child-care expenses for children under age 13, will rise significantly in the next few years. Starting in 2003, qualifying parents can claim up to $1,050 for child-care costs for one child, or $2,100 for two or more children.

Saving for educational costs: Coverdell Education Savings Accounts, formerly known as Education IRAs, have been strengthened. Starting next year, the amount families can contribute to an education savings account, now $500, quadruples to $2,000 per year. The money grows tax-deferred and earnings are tax-free if used for qualified education costs, such as tuition and certain room and board expenses. Starting next year, Coverdell Education Savings Accounts withdrawals can be used to pay not just for college expenses, but also for elementary and secondary school costs, including private school tuition.

State-sponsored college savings plans, commonly known as Section 529 Plans (from Section 529 of the IRS tax code), are also becoming more attractive under the new tax law. Starting in 2002, funds can be withdrawn from section 529 plans free of federal tax, as long as they’re used to pay qualified expenses for higher education.

Caution: be aware of the sunset provision: It’s important to remember the new tax law changes aren’t scheduled to last forever – at least, not as the law currently stands. In passing the tax law, Congress included a “sunset” provision that will effectively undo the new benefits discussed here on Dec. 31, 2010.

For specific information about the new tax law changes, consult your tax advisor or visit the IRS Web site. If you have more questions about how the new tax law might impact your personal finances, consider turning to your professional financial advisor. A qualified financial advisor can answer your financial questions and help align your goals and expectations with the new tax law changes.

December 27, 2001

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