Tax Planning for a Baby: Part 1
Right now, I have several friends who are expecting a baby or are just beginning the joys of parenthood. I’ve found that a lot of time is spent on getting the nursery ready or planning a first birthday party, but less time is devoted to thinking about how to pay for it all.
If you’re a new or soon-to-be parent, take some time to do some financial planning to make sure you’re fully prepared. Here are a few tips to get started.
- Apply for a Social Security Number using Form SS-5 so you can get the tax benefits for your cute, little dependent. You’ll receive a dependency exemption and you could potentially benefit from the child tax credit, child care credit, adoption credits and medical deductions.
- Update your budget. Diapers can add up fast so it’s important to get a good idea of how the new expenses will affect your current and future lifestyle. Besides all the new gear you’ll need for the baby, consider health insurance premiums, hospital fees, daycare costs, and potentially a decrease in income if one parent decides to stop working.
A recent government report shows it costs just under $235,000 (up 3.5% over 2010) to raise a child born in 2011 until age 17. Of course, the total cost can vary based on where you live, how much you earn, your frugality and the number of siblings. Don’t forget about costs of dance recitals, soccer games, piano lessons, and Justin Bieber concerts that you’ll be attending in the future!
- Think about contributing to a 529 plan or another savings account. It may seem crazy to think about college before your baby can even read, but beginning to set aside money early can help dramatically to increase the funds available at college.
- Consider mid-year changes to your paycheck. You can adjust withholding to get more of your refund back now and help with your immediate cash flow. If your employer offers HSA or FSA plans, you can adjust the amount contributed usually within 30 days of a change in family status. Take full advantage of these tax-free benefits to save on the medical expenses and dependent care expenses.
Preparing for a baby can be overwhelming. Spend some time getting your finances ready so you can sleep without worrying…at least until you have to wake up for the next feeding.