Make Sure Your Child Has a Social Security Number
One of the most essential things to consider when planning to have a child is filing as a new parent once the child is born to ensure you have a correct ID number. When you have your child in hospital, you are often required to fill a birth registration form where you check a social security number. However, if your baby is not born in a hospital, you will need to make time to visit a Social Security Administration (SSA) branch near you and request a number in person.
Take Advantage of the Federal Child Tax Credit
Most new parents make the mistake of not claiming all the tax benefits they are eligible for. You and your partner can deduct up to $2000 from your federal income taxes for each child under 17. Technically, these are credits, so if your tax bill is $1000 you are entitled to the maximum credit, and your tax bill goes down to $8000. Even if you don't owe the IRS any money or have liens, you can get the money back as a refund only if you have earned at least $2500.
Update your W-4
In as much as changing your W-4 will not affect your 2020 taxes, it is worth taking a look at for when you are expecting your baby. A W-4 is a form you fill when you start a new job. It enables you to choose how much taxes to withhold from your paycheck. With this, you can claim allowances, including for your new child, which will help bring down the amount of money that is withheld out of every paycheck. To determine the accurate number of withholding allowances, you have to use the worksheets on the W-4. To ensure you claim the right number of allowances.
Open a 529
If you are planning to have a child it is important to known about the 529. Once you have your child, it is important to set up a 529 for your child's college savings. Ideally, college is quite expensive, and that will probably not change anytime soon. College fees will likely rise in cost over the next years. It is for this reason that you should think about your child's education even before you bring him or her into the world. One good thing about a 529 is that the money will grow tax-free.
If you are thinking of welcoming a new child to your family through adoption, you also qualify for credit. According to the IRS, you can be eligible for adoption expenses of up to $14,300 per child. These expenses include court costs, adoption fees and travel expenses. If you adopt a child with special needs, then you automatically qualify for the maximum credit available regardless of your own expenses. This provision is to encourage parents looking to adopt to choose a child will find it hard to get a home. If you are adopting, you should apply for an Adoption Taxpayer Identification Number (ATIN) to start claiming your adopted child as a dependent if he or she does not have a social security number yet.
Most young families do not incur enough dental and medical expenses in an average year to claim a medical expense deduction. This is because you have to spend over 10% of your adjusted gross income on dental and medical costs to claim this deduction. Most parents only know that the hospital costs during the stay of their child's birth count as medical expenses. However, you will be surprised to know that the cost of other supplies like breast pumps are also medical expenses that you can claim. All you have to do is keep the records of all expenses and itemize them in your deductions.
When your baby arrives, consider gathering up your medical bills as this can help you get tax breaks if you itemize them. When filing your taxes, you can deduct the total costs of qualified medical expenses for that year that are more than 7.5% of your gross income. This is your total gross income subtracted by any student loan payments of constitutions to HSAs and IRAs you have made during the year.
Most new parents often forget to claim their new child's care expenses. When you pay someone else to take care of your child or if you take your child to a day centre, you will qualify for the dependent care credit. If you are considering using a child care service or a daycare, you will be eligible for the federal Child and Dependent Care Tax Credit (CDCTC) of up to 35% of costs up to $3000 for one child and $6000 for two or more.
This type of credit, however, applies only for children who are under 13 or if you have children with physical or mental disabilities and are unable to care for themselves. Ideally, the percentage you deduct is between 20% and 35% depending on how much you earn. The more your income level, the less you can deduct.
The worst thing you can do to your child is to leave them with your debts after you die. It is for this reason that you should think about your financial situation before you bring a child into the world. If you have a tax lien, then you should think about how you can have it removed. There are various options including getting on an IRS payment plan, asking for an offer in compromise, or even filing for bankruptcy. This way, you can have your child without worrying about your assets being seized and bringing up your child in a financially stable environment.
Most new parents get too excited to think about the financial implications involved. As seen in this article, it is clear that there are certain things you should consider to save as much as you can from your taxes. Everyone is looking to save, and if you are planning to have a child, then these considerations can come in handy for you. You can take advantage of all the tax breaks by making changes to your withholdings at work, which can help you save some money out of your paycheck.