For parents, challenges come from every direction – feeding times, car seats, sleep schedules, strollers, child care and of course … taxes. What most parents do not consider is that these bundles of joy complicate their tax situation!
Whether you are a 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 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 $17,000 per year ($18,000 in 2024) to the plan for each child! In addition, there is a special provision for 529 plans that allows five years worth of gifts to be contributed at once — a great estate-planning strategy for grandparents. And new this year, there is an opportunity for grandparents to open these accounts with grandchildren as beneficiary and not have it impact their federal needs calculation!
- Update Form W-4. Every year, parents need to review their tax withholding. 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 babies and children. On the other side of the coin, these benefits fall away as your kids age. The Dependent Care Credit is for children under the age of 13 and the Child Tax Credit is available under the age of 17. So plan accordingly.
- Prepare for medical expenses. Having a baby is expensive. So is having kids! Fortunately, there are ways to be tax smart in covering the predictable medical and dental expenses. The first thing to do is try to pay for as many out-of-pocket expenses with pre-tax money. Many employers offer tax-advantaged accounts such as a Health Savings Account (HSA) or a Flexible Spending Account (FSA). So check this out and fund them as much as possible. And while it is more difficult to use medical expenses as an itemized deduction, it is impossible to do if you do not have receipts.
Given the tax considerations of having a family, review this information and forward this tip to anyone who has children. Taking full advantage of the tax benefits that come with being a parent can make a difference. Please call if you have any questions.