I know that this comes well after tax season, but I somehow neglected to write up something about this sooner. Regardless, it’s never too late to plan for the future… So here’s my advice if you want to minimize your tax liability in the coming years: have kids (or have more kids). That’s right, the impact of kids on your tax liability is truly amazing!
Case in point… For the 2004 tax year, we had total taxable income of ~$71, 500 (line 22 on form 1040; this is after pretax deductions for things like retirement accounts and health insurance). But when all was said and done, we had a total federal tax liability of just over $1000 (line 62 of form 1040). According to TurboTax, our effective federal tax rate was just 1.28%. That’s pretty unbelievable if you ask me. I actually felt a bit guilty about paying so little, and I ended up going back through our return to double- and triple-check the figures to make sure they were right. Sure enough, they were.
Not surprisingly, our low tax liability was largely due to the fact that we have four kids, although we did have a good number of other deductions (mortgage, the state sales tax tabled value + sales tax on a new car purchase, charitable donations, etc.). But ignoring those other factors for the moment, it really is hard to beat the extra exemptions plus the $4, 000 in tax credits from the kids. Yep, that’s $4k in credits substracted straight off our tax liability. To be completely honest, I’m not a big fan of child tax credits… I’ve always had a problem with what amounts to paying people an annual stipend for having kids. But as long as it’s on the books, we’ll be taking advantage of it.
And for the record, my initial statements were tongue in cheek… Having kids in order to save on taxes is not only twisted, it’s also the definition of penny wise and pound foolish. Whatever you save on taxes will pale in comparison to multitude of child-rearing expenses that you’ll incur.