Are you expecting your first child? Or did you recently have your first child? First, congratulations! Welcome to the wild, wonderful, and exhausting world of parenthood. You're likely very busy with making sure everything is perfect for your new bundle of joy, from decorating the nursery to childproofing the house to loading up on cute, mini-sized outfits.
Your taxes are probably the furthest thing from your mind. The truth is, though, that having a baby is a major life event and it can have a huge impact on your tax situation. You're now eligible for a several new deductions. You should also consider the tax ramifications of some major decisions, such as choosing a child care provider and deferring money into your Flexible Spending Account.
Important Items in Tax Planning for a Baby
While tax planning for a baby isn't the number one item on your to-do list, it also shouldn't be ignored. Taking some time to consider the items below will help you make informed decisions and take advantage of every tax credit and deduction to which you are entitled. A tax preparation expert or accountant can also help you in the planning process:
1) Get a Social Security number for your child.
When your child is born, someone at the hospital will provide you with information on how to obtain the birth certificate and a Social Security number. Take care of these items as soon as possible. There are several exemptions, deductions, and credits to which you will be entitled, but your baby needs a Social Security number for them to count.
2) Change your withholding to consider exemptions and credits.
Your child protects $3,950 of your gross income from taxation. If you're in the 25 percent bracket, that comes out to $987.50 in taxes you will no longer have to pay.
You're also entitled to a $1,000 tax credit that you'll receive every year until the child turns 17 years old. To receive this credit, you don't have to do anything except claim the child as a dependent on your return.
These exemptions and credits will likely reduce your tax liability. You may want to decrease your withholding so you get more pay out of every check. Your tax advisor can help you decide how much you should withhold.
3) If single, consider filing as head of household.
If you're married, having a baby doesn't change your filing status at all. However, if you're single and will provide more than 50 percent of the care for the child, you could file as head of household. That would increase your standard deduction and could improve your tax bracket, depending on your total household income.
4) Choose your child care provider carefully.
Child care is usually a costly service. The government provides some relief by offering a sizable deduction for child care costs. You can deduct up to $3,000 in child care costs. If you're in the 25 percent bracket, that saves you $750 in taxes.
However, it's important that your provider claims their income on their tax return. You'll need their Social Security number or Tax ID to take advantage of the deduction. Some in-home providers don't do so. If you're using an in-home provider, be sure to ask about this and see if you'll be able to claim the expense.
5) Decide whether to put money into your FSA.
You can pay for child care in a tax-efficient manner by contributing money to your company's Flexible Spending Account. If your company offers an FSA, you can contribute up to $5,000 per year. The contribution is made before taxes are taken out, so it allows you the opportunity to pay for childcare with pre-tax money.
However, you should be certain that you're going to use it. FSAs have "use it or lose it" rules. Any money in the FSA that isn't used by year-end is lost. Talk to your tax adviser about whether using an FSA for childcare makes sense for your situation.
Start Tax Planning for a Baby as Early as Possible
Tax planning for a baby may not be the most exciting part of welcoming a new child, but it is important. A child is a huge financial responsibility. The government wants to help parents manage the costs by providing certain kinds of tax relief. However, you have to take some steps to take advantage of those credits and deductions.
A knowledgeable and experienced tax planner can help you with tax planning for a baby. It's a good idea to schedule a consultation as early as possible. As you approach the due date, you'll likely be too preoccupied with other things to devote much time to tax planning. The tax planner can review your financial situation, explore any deductions and credits for which you may be eligible, and advise you on the steps you need to take to optimize your tax situation.
