5 Tax Saving Strategies for New Parents Having your first child is an extremely joyous and momentous occasion! The ability to nurture, support, and cherish a new life is truly a gift. However, with this tiny, precious added bonus in your life, often comes added responsibilities – both financial and otherwise.
Don’t let the mere possibility of financial strain get you down, though. If you are about to or have recently become a new parent, you’ve come to the right place! Read on, and you’ll find not one, but five (5!) of our top tax saving strategies for new parents.
You can save money, provide your family with an increased quality of life, and rest easy. With our tax planning and return services, you’ll benefit even more.
Things to Keep in Mind Regarding Tax Saving Strategies
There is one requirement to participate, however: In order to take advantage of any of the strategies outlined below, you must obtain a Social Security Number for the newest addition to your family. For your convenience, this can be completed while at the hospital, along with the birth certificate application.
You may also apply directly through the Social Security Administration. To do so, you will need proof of your child’s age, identity, and citizenship.
Beware – If you have a dependent and do not claim them when filing your taxes, you can be fined and potentially even delay receipt of your return.
Below, we will expand upon the 5 tax saving strategies that every new or soon-to-be parent should consider.
1. Dependent Exemption
One of the more widely-known and utilized tax-saving strategies is called the dependent exemption. One of the main pros is this: No matter what time of year your child was born, you will always receive an entire year’s exemption.
If you claim your new child as a dependent, you will be able to “shelter” or minimize the amount of your income that is able to be taxed. Thus, you will end up paying less in taxes, as your taxable income has decreased. Who doesn’t want to owe less?
The amount you can shelter is directly correlated with how much your annual amount of gross income is. In short, the more money you make, the more money you are able to save!
2. Adjust Government Withholdings
While not a tax deduction or credit, one of our other recommended tax-saving strategies is to adjust your withholdings. To do this you will need to complete a new W-4 form from your place of employment. With the new addition to your family, you can increase the number of allowances you claim.
By increasing the number of allowances, you will be reducing the number of funds the government withholds, as a result, you will retain more of your income thus allowing you to have access to it when you need it the most.
3. Child Tax Credit and Child and Dependent Care Credits
Two other useful tax saving strategies are the child tax credit and dependent care credits. Below, you’ll find some additional information on both.
On the Child Tax Credit:
The child tax credit is quite simple, actually. Until your child is 17 years old, you will receive a $1,000 credit on your taxes, which will reduce the total amount owed, and lessen your financial burden once tax season is upon you.
This credit differs from a deduction in one specific way. As opposed to reducing the overall amount of income which will be taxed, it reduces the actual amount you owe. For example, if you owed $50,000 and you received a $1,000 credit, you would then owe only $49,000.
On the Child and Dependent Care Credit:
Under the child and dependent care credit, provided that you and are earning taxable income and paying for your child’s care while doing so, you can benefit from receiving yet another credit. The amount varies, though, depending on these three things:
- The number of children for which you are paying for care
- Your income
- How much your childcare costs
For one qualifying dependent under the age of 13, you can receive up to $3,000. If you have two or more dependents to claim, the amount credited to you will greatly increase. You can receive upwards of $6,000.
If you qualify for one (or both!) of these credits, you’ll be able to save even more on your taxes. The best part? Both of these are credits, as long as you continue to meet the minimum requirements to qualify.
4. Adoption Credit
Are you thinking about or in the midst of the adoption process? You may want to consider looking into the adoption credit. Since there are often many costs associated with adoption (such as travel and any legal/administrative fees), the United States government and may provide you with another credit to offset or lessen some of these financial burdens.
In addition, some employers even offer programs to assist with adoption costs. These often come in the form of a reimbursement that is tax-free. Yay!
5. Dependent Care Reimbursement (Or Flexible Spending) Account
Yet another option sure to be of interest to many new parents is a dependent care reimbursement or flexible spending account. It’s highly likely that having a flexible spending account may prove to be even more beneficial than the child care reimbursement credit.
The primary reason is that unlike other and benefits, there is neither federal income nor Social Security tax on the funds and held in this account.
There is a catch, however: If you don’t spend all of the money in your account on qualifying costs, you risk losing it entirely, which is something to bear in mind before setting your account up.
Help Us Help You
If you’ve recently become a new parent and are looking for assistance, we’re here for you! Apart from recommending the tax saving strategies we’ve outlined here, we offer many other different services.
From tax planning, insurance, finance management, asset allocation, charitable giving, to retirement planning, business succession planning, and more – we can help you. Contact us to schedule a free consultation today, and we’ll contact you in under 24 hours! How’s that for dedication?
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Gilbert, AZ 85296