Are you or someone you know a new parent this year? This big change in your life could also have an impact on your taxes. Here are some of the tax benefits (i.e. ways to save money) that you may want to consider taking advantage of.
Social Security Number
The first item to know is that you must apply for a social security number for your new baby. If you do not have that social security number before your tax return is due, you will not be eligible to claim them as a dependent on your tax return. The easiest time to apply is usually when you are applying for the birth certificate at the hospital.
Exemption and Filing Status
You can claim the baby as a dependent and deduct the exemption (up to $4,050 in 2016) even if the baby is born the last day of the year. If your income is too high, the exemption might be phased out on your federal tax return, but you may still get an exemption on your state tax return.
If you are a single parent (or married and filing separately as head of household), then you can claim the more advantageous head of household filing status rather than single individual. With this filing status, more of your income will be taxed at lower rates.
Child Tax Credits
If your Federal tax is less than the amount of the Child Tax Credit, you may be eligible to claim the Additional Child Tax Credit and receive a refund even though you do not owe any Federal tax.
Going Back to Work
If you are going back to work, then you may be able to save on your taxes if you will pay day care expenses. If you (and your spouse) have earned income, you may claim the Child and Dependent Care Credit. This credit could be 20-35% of your allowable expenses, up to $3,000 of child care expenses ($6,000 if you have two or more children).
If your employer offers a dependent care benefit, you can set aside funds as a pre-tax deduction to pay for childcare. Since you will not be paying income taxes on the money you set aside for childcare, this option will reduce your eligibility for the Child and Dependent Care Credit. You will have to calculate which of these options will be more advantageous in your situation.
Another consideration will be getting medical insurance for your new baby. You may need to switch to a family plan, and will need to file paperwork with your employer or insurer soon after the birth to be covered.
For your uncovered medical expenses, you can plan ahead and fund your Flexible Spending Account (FSA) through work. The amount you contribute to your FSA will not be taxed as income (up to $2,550 per year, subject to plan limitations), but you generally must spend the funds that year. If your FSA plan does not allow you to carry contributions over to the next year and you will lose any funds not spent that year, you do not want to contribute more than your expected out-of-pocket health care costs.
Is it ever too early to start saving for college?
Many states, including Missouri, sponsor Qualified Tuition Programs (529 plans). Money contributed to these plans often results in a state tax deduction. Then the money grows tax free in the account until you make a withdrawal. As long as you have qualified education expenses, there will be no tax due on any of the earnings in the account when you withdraw funds possibly many years from now.
As always, feel free to reach out to your Moneta Group advisory team or Tax Strategies – we are here to help!