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Challenge your property tax bill if you think it's too high. Estimates hold that as many as half of American homeowners pay more in property taxes than they have to. If you're self-employed, you can deduct 50% of your meals and entertainment, if business related. If staying at home full time isn't feasible, look into forming a cooperative with other parents. | |||||||||||
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Related Sites "Expenditures on Children by Families" in PDF format Insure.com Bluefly eHealthInsurance.com Drugstore.com |
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| Raising your quarter-million dollar baby | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Children are priceless, but raising them is probably the most expensive thing you'll ever do. Here are some strategies and tips that may help. By MSN Money staff Every newborn child is a bundle of joy. But you better have a bundle of cash on hand if you want to raise one. For 2004, the newest data available, the U.S. Department of Agriculture estimates that families making $70,200 a year or more will spend a whopping $269,520 to raise a child from birth through age 17. Higher-income families in urban areas in the West spend the most, $284,460. Though not as steep, the figures for lower-income families are just as unsettling: $184,320 for families earning $41,700 to $70,200 and $134,370 for families making less than that. That breaks down to nearly $15,000 a year from birth to age 2 for families in the $65,800 -plus income bracket. As your child ages, he or she gets even more expensive, topping out at $15,810 from ages 15 to 17. This is no back-of-the-envelope guesstimate. The survey involves visits to, and interviews with, about 5,000 households, four times a year.
Nor is there much in the way of cost-effectiveness for larger families. With an older child of 16, the USDA study says, a family with a second child under 2 lays out $20,740 for the both of them each year, with the numbers growing progressively as the children get older. With three children -- the two older ones being 16 and 13 -- a third child aged 2 years or less rings up an annual bill of $24,160.
Sobering? No doubt. Misleading? Absolutely. On the down side, the study doesn't take into account certain expenses incurred by some families, such as heavy medical bills or pricey private schools. It's a composite average and, by definition, that means your numbers either will be a little (or a lot) higher or lower. Even worse, since the survey ends at age 17, it doesn't take into account the millions of college students who are supported in part or in full by their parents. That's another $20,000 to $150,000 for a four-year education, depending on the school. It also doesn't consider lost income that occurs when one parent decides to stop working or take off several years to raise their children during the early years -- or take a lesser-paying job with more predictable hours. That's money out of your pocket. However, that's not to say the numbers should prompt a nationwide rash of celibacy vows. The study breaks down overall expenditures into various categories and subsections. (The information is used by various state agencies and court systems to determine child support guidelines and foster care payments, among other things.) Within those individual expense categories lies some good news, as there are strategies and tips that may allow parents to trim those expenses. We'll go through each of the major categories, give the total cost for families from the low to high ends and then offer cost-cutting ideas and some tax tips from our tax expert, Jeff Schnepper. Housing Cost through age 17: $44,580 to $100,080 This is the biggest single expense of raising children, comprising anywhere from 33% to 37% of the overall annual expense. What you can do You could ignore one of the basic assumptions used by the USDA in calculating additional housing costs. You could decide not to move up into a larger home. The table assumes that for each child you have, you're going to add 100 to 150 square feet of living space to your home. By definition, that means you're either going to renovate your existing house or buy a new one. Go against the flow and figure out how to use the space you've got. For many families, that solution won't get it done. Try this: If you've had your mortgage for a while and plan to stay in your home, keep track of mortgage rates and consider refinancing when the rate is more than a percentage point below your current mortgage. It can save hundreds to thousands of dollars on the loan. You can get an idea about current rates and offers by starting here.. Challenge your property tax bill if you think it's too high. Estimates hold that as many as half of American homeowners pay more in property taxes than they have to. Additionally, make your home as energy efficient as you can. That means everything from replacing old and inefficient furnaces and water heaters to bolstering insulation. Finally, give some thought to moving to a less-expensive place to live. Not only does that mean a smaller house across town, but it could be a completely different part of the country. What with median home prices in some areas topping $400,000, look into parts of the country where housing prices (and property taxes) may be a bit more manageable. Tax tips Make as much as possible of your housing costs tax deductible. Interest and real-estate taxes are deductible. Use your home equity to finance other expenditures. The interest on debt of up to $100,000 secured by the equity in your house is tax deductible. It doesn't matter what you use the money for. Consider a home office. Now, you can qualify for a home office even if you only do managerial duties or simple record-keeping there. Prior to 1999, it had to be where you actually performed the activities of your job. If you have a home office, you can deduct the percentage you use for business of all your housing costs. These include interest, taxes, insurance, utilities, landscaping, depreciation and the cost of any furniture or equipment you use in your home office. Food Cost through age 17: $26,490 to $39,470. This accounts for 15% to 20% of the overall expense. What you can do Set strict limits on the more-discretionary forms of food spending. For instance, tell your children they can spend no more than $5 a week on fast food. That alone may save a couple hundred of dollars a year. Use the Web to shop for bargains. There are -- literally -- thousands of shopping-related Web sites and many of them now allow you to compare costs among similar items. Here's a simple trick that really works: When you're searching for a specific item, go to one of the search engines and type in that item and the word "discount." You'll be amazed at what you'll find. Consider joining a warehouse club such as Costco, BJs or Sam's Club. While they're not suited to everyday shopping, they let you stock up on certain items in quantity, often at substantial savings. Look to these places for things such as soda, canned and dried goods and other sorts of non-perishables. If you lack adequate storage space, divide your bulk goodies among neighbors and friends. Wholesale food services, which sell meat, noodles, fish and other groceries in bulk, will deliver them to your door. Not only can you plan meals well in advance, but also shoppers can save close to 50% off conventional grocery store prices, although you still have to go to the store to buy fruits, vegetables and other items. You'll find other tips on supermarket savings here. Tax tips If you're self-employed, you can deduct 50% of your meals and entertainment, if business related. If your children refer clients or customers to you, you can deduct the cost of taking them to a restaurant if business is discussed. If self-employed, you can also deduct the cost of food for a business party. Make a separate shopping trip and keep records of your business guests and the business discussed. If your children are old enough to work for you and are required to be on the business premises and available for work during lunch, then the cost of that lunch (if available to all employees) is deductible to you and tax-free to your children! Again, proper record-keeping is paramount here, as is the above rule of reason. Transportation Cost through age 17: $18,660 to $34,860 Transportation can eat 13% to 14% of the total. This includes the purchase and finance charges of vehicles, repair and fuel expenses and insurance. What you can do Avoid buying a new car. Estimates hold the value of a new car drops by as much as 40% in the first two years of ownership. Instead, look into a used car such as a relatively new model that's coming off a one- or two-year lease. It's likely to be in good shape, may have some of its original warranty in place and, best of all, will probably be available at a huge discount off its original price. There's detailed advice here. After you've found the car, don't forget to shop for the best insurance rates. The cost of auto insurance can vary by several hundred dollars for the exact same level of coverage. Use our auto insurance planner to find the best deal. Here's how to cut the costs of insuring a teen driver. Tax tips If your children work for you and use your car for business purposes, then the business percentage (business miles over total miles) of your gas, insurance, repairs, interest, maintenance, registration, depreciation, tolls and parking are all deductible. Alternatively, you could deduct your business miles at 40.5 cents in 2005, plus tolls, parking and interest expense for your car. Put your children's cars in your name. It reduces the insurance you have to pay (multiple-vehicle discount) and allows you to deduct any business expenses incurred on your return. The down side is that you may be liable for any accidents. That's why you have auto insurance . . . which is deductible to the extent the car is used in business. Clothing Cost through age 17: $8,490 to $12,810 Clothing accounts for about 6% to 8% of the total costs. What to do New parents quickly discover the cottage industry of saving and sharing newborn and toddler clothes, so take full advantage to skirt the outlandish expense of buying clothes for your little one(s). Also, seek out some of the thousands of manufacturer outlets across the country where you can buy perfectly good clothes at upwards of 50% off their original price. The Internet also offers outlet-shopping opportunities -- at Bluefly, for example, shoppers can choose from dozens of designer labels at discounts as large as 75%. Buy neutral-colored clothing that can be shared easily among siblings, regardless of gender. Shop sales and at the end of season so you're not paying any premium for your children's clothes. Finally, as your children get older and start generating some sort of income -- babysitting, shoveling snow, perhaps a part-time job -- make it clear to them that, should they want a designer-label piece of clothing, they'll have to cough up at least part of the cost, if not all of it. Liz Pulliam Weston shares her tips on saving on gear for a new baby. Tax tips Clothing is not deductible. However, advertising is deductible if you are self-employed. If you are an employee, remember that you can be self-employed with a second job. I had shirts printed up for my children with the name of my book, "Ask My Dad How to Pay Zero Taxes" on the front. That's tax-deductible advertising. Think Century 21 and their gold jackets. Health care Cost through age 17: $10,680 to $15,870. Health care represents 5% to 7% of the total costs, but those numbers are misleading. For some families, it's a non-issue, for others the numbers can be mind-boggling. What to do Since much of this expense comes from health insurance premiums, it pays to shop around if you have the option of choosing your insurance carrier. Monthly premiums can vary a lot. You can compare health insurance premiums here. Sites such as eHealthInsurance.com also offer information on health maintenance organizations and preferred provider organizations and which ones may prove most cost effective for you. From there, you can trim your health-care expenses by going with the largest deductible you can handle. Also, check to see if your premiums are lower if you pay semi-annually or annually instead of more frequently. If the cost of prescription drugs seems off the chart, check to see if Internet-based drugstores can supply you for less -- two are Drugstore.com and Rx.com. If you have no health insurance, we have some advice on where you can find free care here. If you work for a large company, make certain you use your employer's cafeteria plan if one is available. This lets you set aside pre-tax dollars for expenses such as deductibles, co-payments and non-covered items such as dentistry and eyeglasses. It doesn't reduce the cost of health care directly, but it shaves money off the taxes you pay on money that does go toward medical bills. Tax tips Medical expenses are deductible to the extent they exceed 7.5% of your adjusted gross income. Such expenses include not only doctors and hospitals, but also dentists, prescription drugs, medical insurance and any necessary medical equipment. If you are self-employed, 100% of your health-insurance costs can be deducted, without any reduction, even if you don't itemize. Anything you pay for the diagnosis, cure, relief, treatment or prevention of any disease is deductible. Child Care/Education Cost through age 17: $12,090 to $33,870 These expenses account for 7% to 11% of the overall expense. Big caveat: The figures do NOT include college. What to do If staying at home full time isn't feasible, look into forming a cooperative with other parents. For instance, each parent agrees to look after all the children in the group for a certain number of hours a week. However, this may require a potential investment in day-care equipment and local licensing if enough children are involved. Alternatively, if you have a parent of your own nearby, see if he or she would be willing to do some baby-sitting. Tax tips Child care: If you and your spouse both work (or one is disabled or a full-time student), then you qualify for the child-care credit. That credit, a dollar-for-dollar reduction in your tax, ranges from a minimum of 20% to a maximum of 35% of the first $3,000 you pay for a child under age 13. For two or more children, the credit tops out at $6,000. That could mean, if you have two children in care, an additional $2,100 in your pocket. Here's where it gets to be fun. Not only does the credit apply to child care and baby-sitting, but it counts any home care necessary for you both to work. Therefore, if you hire a maid to clean your house because you work, the cost of that maid counts toward the credit! The cost of a day camp can be deducted too, but not if it includes overnight stays. Don't forget the child tax credit. For each child under age 17, (maximum three qualifying children), you will get a credit of $1,000 for 2005. The credit phases out as your income exceeds $110,000 ($75,000 if single, head of household, or a qualifying widow(er)). Education: Set up an education IRA or invest with various state prepaid tuition plans where the income is either tax deferred or completely excluded. Alternatively, or in addition, invest some dollars under your children's names. The income will be taxed to them at their lower rates. Once they enter college, the Hope Credit and the Lifetime Learning Credit will reduce your taxes further. The Hope Credit, for the first two years of college (freshman and sophomore years), is 100% of the first $1,000 in qualified expenses and 50% of the next $1,000, or $1,500 out of the first $2,000 paid. The Lifetime Learning Credit, which covers the last two years of undergraduate studies plus any graduate courses, is 20% the first $10,000 paid. (See also, "Tax breaks to get your youngster through Yale.") When they graduate, interest on any student loans may be deductible -- even if you don't itemize. You can deduct up to $2,500 in student loan interest above the line. Miscellaneous Cost through age 17: $13,380 to $32,460 This last category takes in 10% to 13% of the total cost and includes things such as personal-care items, entertainment and reading materials. What to do Stock up on personal-care items at bulk warehouses where the cost is cheaper per item. To trim the expense of fun, check out entertainment clubs where, for a flat fee, you get significant discounts at restaurants, movie theaters, fast food joints, theme parks and other places. To cut down on the expense of books, rely on your local library or used bookstores. Likewise, if you're in the mood to rent a movie, many libraries have substantial tape collections. If your child is interested in summer camps, check out the local community organizations rather than sending them off to two-week camps that can run into the thousands of dollars. Music? Rent the instrument to begin, with a purchase option if your child sticks with it. Don't forget about pawnshops and used equipment, either. And, as with other sorts of more-discretionary expenses, expect older children who may be earning some part-time income to contribute something. Tax tips Instead of paying strangers to mow your lawn or clean your pool, pay your children. If you are self-employed, hire your children to work for you. The IRS has validated children as young as age 7 to work for their parents' unincorporated businesses. For 2002, you can employ and pay your children as much as $5,000 (plus another $2,000 if they opt for a deductible IRA) each, tax-free to them and deductible to you. If your business is not incorporated, and your children are under age 18, you don't have to pay Social Security/Medicare or state unemployment/disability, either! Let them use these dollars, tax-deductible to you, to pay for these miscellaneous expenses. Then smile and think about how much you are going to cost them when we all get older. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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