For new parents, information is coming from every direction – feeding times, car seats, sleep schedules, strollers, child development and of course … taxes. What most new parents do not consider is that this little bundle of joy just complicated their tax situation!
Whether you are a new parent, grandparent, or know someone who is expecting, here are some tax tips to consider:
• Initiate a 529 education savings plan. 529 education savings plans are a great way to kick off the baby’s savings for the future. These plans offer low-cost investments that grow tax-free as long as the funds are used to pay for eligible education expenses (including up to $10,000 for elementary and secondary tuition). States administer these plans, but that doesn’t mean you are stuck with the plan available in your home state. Feel free to shop around for a plan that works for you. Starting to save early, even a little bit, maximizes the amount of tax-free compound interest you can earn in the 18+ years you have before going to college.
Bonus tip for family and friends: Anyone can contribute up to $15,000 per year to the plan for each child! In addition, there is a special provision for 529 plans that allows five years worth of gifts ($75,000) to be contributed at once — a great estate-planning strategy for grandparents.
• Update Form W-4. Once parent(s) return to work, year-to-date withholding and current allowances on the Form W-4 need a review. Remember the birth of a child brings new tax breaks including a $2,000 Child Tax Credit and Child and Dependent Care Credit for child-care expenses. These credits can be taken advantage of now by lowering tax withholdings and increasing take-home pay to help cover diapers and other needs that come with a new baby.
• Track medical expenses. Having a baby is expensive. According to Business Insider, the average cost to deliver a baby (without complications) is over $10,000. That doesn’t include the extra doctor visits and other medical expenses that might accumulate. There are ways to pay for medical expenses with pretax dollars or take tax deductions, but there needs to be a plan and receipts need to be saved. Many employers offer tax-advantaged accounts such as a Health Savings Account (HSA) or Flexible Spending Account (FSA). If not, an individual account might be available, depending on your insurance, or itemized deductions may be taken.
Given the tax considerations of having a new child in the family, review this information and forward this tip to anyone expecting a new addition. Bringing home a new baby is one of the great joys in life. Taking full advantage of the tax benefits that come with being a new parent make it even better. We hope you find these tax tips to be helpful. If you want a CPA firm to handle your taxes for you, visit Tax Services and contact us to schedule a free thirty-minute introductory appointment to determine if we are a good fit.