How much will it cost me to raise a child?

We can’t tell you exactly what your child will cost, but we can provide you with estimates. Knowing what to expect will allow you to plan for the future. Here is a breakdown of the items you’ll need, and an estimate of their costs.

Note: These estimates are for a first child. Bear in mind that second or third children will cost less than the first, since you will already have purchased many of the items you need.

Government estimates say that a family with an income of $115,400 will spend a total of $298,680 to raise a child to age 17. If you include the cost of college, that cost goes up to $450,000. If your child requires orthodontia, add another $10,000. If you buy your child a car, add that in, too. For an only child, add 25% to the cost.

About a third of the amount spent in the government estimates goes to cover the portion of your rent or mortgage allocated to the new member of your household. It also includes the extra cost you’ll incur in making sure you have enough room now that your family is bigger.

How can I teach my kids good financial skills?

Once they reach school age, children should start learning rudimentary financial skills.

You might start to teach your kids in the following areas:

Their Allowance. Give your kids control over their own money (their allowance and whatever monies you give them that are not earmarked for some particular purpose). You can make suggestions to them about what they should do with it, but allow them the final say on what happens to the money. Let them see the consequences of both wise and foolish behavior with regard to money. A child who spends all of his money on the first day of the week is more likely to learn budgeting if he is not provided with extras to tide him over.

Savings and Investment. Beyond the basics of budgeting and saving, you’ll want to get your child involved in saving and investing. The easiest way to do this is to have the child open his or her own passbook savings account. If you want your child to get familiar with investing, there are various child-friendly mutual funds and individual stocks available.

Taxes and Credit. Kids can start using credit cards at an early age with parental counsel and involvement. They can learn the concepts of incurring and paying off debts both from credit card use and from small loans that parents make them. If children have to file tax returns-as they would with an IRA–allow them to participate in the process; this will get them used to the idea of yearly tax payments.

What is the “kiddie tax”?

In the past, parents would invest in the child’s name in order to shift income to the lower-bracket child. However, the addition of the “kiddie tax” mostly put an end to that strategy.

Investment income in 2009 over $1,900 of children under the age of 19 (or 24 if a full time student) is taxed at the parents’ rate. (For 2008, the threshold was $1,800. This threshold is indexed annually for inflation.) Once the child reaches age 19, however, all income is taxed at the child’s rate. Of this $1,900, one-half probably won’t be taxed due to the availability of the standard deduction while the other half would be taxed at the child’s rate.

Note: These rules apply to unearned income. If a child has earned income, this amount is always taxed at the child’s rate.

What is an Coverdell Education Savings Account – Section 530 Program (formerly Education IRA) and who is eligible for one?

You can contribute up to $2,000 each year of 2009 and 2008 to a Coverdell education savings account (Section 530 program) for a child under 18. These contributions are not deductible, but they grow tax-free until withdrawn. Contributions for any year (say 2008) can be made through the (un-extended) due date for the return for that year (April 15, 2009).

Note: For the $2,000 contribution limit, there is no adjustment for inflation and therefore, the limit is expected to remain at $2,000 for 2010 and beyond.

Only cash can be contributed to a Section 530 account and you cannot contribute to the account after the child reaches his or her 18th birthday.

Anyone can establish and contribute to a Section 530 account, including the child, as long as the contributor’s modified AGI doesn’t exceed $220,000 for a joint return or $110,000 for a single filer. You may establish 530s for as many children as you wish, and the child need not be a dependent – in fact, he or she need not be related to you. But the amount contributed during the year to each account cannot exceed $2,000. This maximum contribution amount for each child is phased out for AGI between $190,000 and $220,000 (joint) and $95,000 and $110,000 (single).

What kinds of household workers are covered by nanny tax rules?

The worker must do work in or around your home. Examples are baby sitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. And the worker must be your employee, which means you can control not only what work is done, but how it is done.

It does not matter whether the work is full time or part time, or that you hired the worker through an agency. On the other hand, if only the worker can control how the work is done, the worker is not your employee, but is self-employed.

What federal tax forms must I file if I have a household employee?

Form W-2 and Schedule H of Form 1040. Specifically:

  • A separate Form W-2, Wage and Tax Statement, must be filed for each household employee to whom you pay Social Security and Medicare wages, or wages from which you withhold federal income tax. Give Copies B, C, and 2 to your employee by January 31st and send Copy A of Form W-2 with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration by February 28th.
  • Use Schedule H (Form 1040), Household Employment Taxes, to report the federal employment taxes for your household employee if you pay the employee Social Security and Medicare wages, FUTA wages, or wages from which you withhold federal income tax.
  • File Schedule H with your federal income tax return. If you are not required to file a tax return, file Schedule H by itself.

How can I spot a rip-off?

By taking the following precautions, you can spot a scam and avoid being ripped off.

  • Don’t allow yourself to be pushed into a hurried decision. At least 99 percent of everything that’s a good deal today will still be a good deal a week from now.
  • Always request written information, by mail, about the product, service, investment or charity and about the organization that’s offering it.
  • Don’t make any investment or purchase you don’t fully understand. Swindlers try to convince individuals that they are making an informed decision.
  • Ask what state or federal agencies the firm is regulated by, and contact the agency. If the firm says it’s not subject to any regulation, you may want to act cautiously.
  • If an investment or major purchase is involved, request that information also be sent to your accountant, financial advisor, banker, or attorney for evaluation and an opinion.
  • Before you make a final financial commitment, ask for a refund provision in writing.
  • Beware of testimonials that you may have no way of checking out.
  • Don’t provide your credit card number and bank account information over the phone.
  • If necessary, hang up or walk away. If you hear your own better judgment whispering that you may be making a serious mistake, just say good-bye.

What are some of the Internet scams I should watch out for?

Here are a few of the scams making the rounds on the Internet these days.

The Nigerian Letter Scam

The Nigerian Advance Scheme letter promises a bonus of $600,000 if the recipient’s checking account can be used to temporarily store millions of dollars in foreign aid. Of course, once access is given, the only “aid” involved is your money, which is used to line the scamsters’ pockets.

“You Are Owed Money”

This scam involves the use of the 809 area code. Individuals are told to call a long-distance number so that they can obtain help in finding funds that they are owed. The catch is that the caller is charged for the call, as with a “900” number.

The Mystery Shopper Scam

Mystery shoppers do not usually indicate a scam; they are individuals who are asked by legitimate marketing professionals to buy products and report results. However, a scam version gets people to pay money for useless information on how to become a mystery shopper. If you are solicited to call an 809 area code to become a mystery shopper, don’t dial the number.

How can I prevent the illegal use of my credit card or Social Security number?

Do not subject yourself to fraud by allowing a merchant to write your credit card number on your personal check or your personal information on a bank credit card sales slip. Do not divulge your social security number if you can avoid it.

“Application fraud” occurs when a thief uses your name, Social Security number, address and, perhaps, credit references to apply for credit. They can get much of this information from public sources (e.g., Who’s Who Directories), from someone who has access to credit files (e.g., employees of car dealerships, department stores, or credit bureaus), from personal checks, or from stolen wallets. Credit thieves may be aided by “credit doctors” who are paid hundreds of dollars for finding a good credit record for the thief to use.

Another form of application fraud involves the interception of pre-approved credit card offers in the mail. The thief fills out the application and either changes the address or steals the credit card out of your mailbox when it arrives at your address.

Tip: If you find a bill that you do not believe belongs to you on your credit report, check it out immediately. First contact the creditor to find out if they have an account in your name. Ask to see a copy of the original application if they say you do.