Well, for starters, congratulations!
Welcome to the parent club. Your adventure is just beginning.
As far as tax considerations, a recent article from our friends at Kiplinger is spot on regarding your question.
The article is titled "The Most-Overlooked Tax Breaks for New Parents" and it has some great 411 on some ways your little one(s) can help save your family money at tax time.
Before doing anything, however, make sure your child has his or her own Social Security number. This is key.
For example, you will need that SSN to claim your new baby as a dependent on your tax return.
That is right, you will get hit with a $50 fine and it will delay your refund.
Teaching point: Request a Social Security number for your newborn at the hospital when you apply for a birth certificate.
Here are some other tax benefits noted in the original article:
Claiming your son or daughter as a dependent will shelter $4,000 of your income from taxes in 2015. In turn, this will save you $1,000 if you are in the 25% bracket.
Oh, by the way, you will receive the full year's exemption regardless when your child was born or adopted during the year.
Child Tax Credit.
A new baby also entitles you to a $1,000 child tax "credit" every year until your dependent son or daughter turns 17, no matter when the child was born during the year.
Unlike an "exemption" that reduces the amount of income the government gets to tax. That is right, a "credit" reduces your tax bill dollar for dollar.
Consequently, that $1,000 child credit will actually reduce your tax bill by $1,000.
Increase Your Take-Home Pay.
When you claim another dependent, you will cut your overall tax bill.
As a result, go ahead and decrease your tax withholding from your paychecks with a new W-4 form.
The government does not pay interest on the excess withholding, so why give it more than necessary.
Head of Household Filing Status.
What if you are a single parent?
Having a child may allow you to file as a "head of household" rather than as a single.
What does that mean?
Well, you will be able to claim a bigger standard deduction and more advantageous tax brackets.
How do I qualify?
You must pay more than half the cost of providing a home for a qualifying person like your new child.
Earned Income Credit.
This credit offsets federal payroll and income taxes for low- and moderate-income workers. Having a child pushes the cutoff to claim the EIC to $44,650 for 2015 returns.
The income cutoff is higher if you have two or more children.
If you pay for child care so you can go to work, and that income is taxed, then you can earn a credit if you are paying for the care of children under 13.
The size of your credit depends on how much you pay for care and your income.
IRAs for Kiddos?
An IRA can be a relatively small investment when a child is young. Nevertheless, with the tax-deferred compounding the account can grow exponentially over the decades.
Problem: You cannot just open an IRA for your newborn and start throwing in cash!
Unfortunately, a "taxpayer" must have earned income from a job or self-employment to have an IRA. [No, "gifts" from grandparents and investment income do not count.]
As a result, unless your newborn is a "model" for hire (e.g., the "Gerber" baby). then you will need to wait until your child starts earning some money by babysitting, mowing lawns, etc.
That noted, while your kiddo must have earned income, it need not be their earnings that fund the IRA account.
Parents or grandparents can give the child money for the IRA, but it is limited to the lesser of $5,500 a year or 100% of the child's earnings.
As you can see, there are a lot of potential tax savings when a new one arrives.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Kiplinger (February 2016) "The Most-Overlooked Tax Breaks for New Parents"