Welcoming a new baby into the family is always a cause for celebration. What new parents may not realize, though, is that the new addition also comes with some practical tax benefits—and also a few tax complications. But when you know how to manage your return, your growing family doesn’t have to add more stress. Even the baby’s grandparents and other relatives can look into new opportunities for lowering their own tax obligations!
How New Babies Impact Your Taxes
Once you have a new baby in the picture, you’ve also opened yourself up to some new paperwork on your tax return. For starters, you’re getting a new dependent. In addition, you also have some options to offset your taxable income. One of the first things you’ll want to consider is a 529 education savings plan. Setting up an account can be a great long-term investment for your child.
When you contribute money to a 529 plan, the funds will grow tax-free. Of course, that’s only if you put them toward qualifying education expenses down the road. Saving early can help you maximize the plan’s potential. By starting right from birth, you’ll see plenty of return on your investment. And that can definitely make a big difference for college tuition when they reach age 18.
The second major item relates to your Form W-4. As a parent, when you return to work, you’ll be able to start claiming the $2,000 Child Tax Credit, as well as the Child Care Credit for your daycare and other care expenses. Taking advantage of these credits is a great way to free up your budget for the other expenses that come with having a baby. (It’s always nice to have some extra money to pay for diapers and toys and new clothes.)
Growing Family Tax Savings Tips
Also remember, the tax benefits that relate to new babies can also extend to other relatives and even family friends. That’s because anyone has the option to contribute to your child’s 529 plan. Individuals have a limit of $15,000 per year. And that certainly adds up!
There’s even a 529 plan provision that lets people contribute $75,000 (the equivalent of five years) all at once. This can be a great incentive for grandparents who want to use the plan as part of their estate planning.
Want to Know What’s Next?
No one can really dispute that taking care of a child is expensive. Being able to utilize these tax planning programs is a smart way to stay ahead of the curve and manage your money effectively for the future.
If you need help running the numbers on what makes the most sense for your family, we’re here for you. NSO and Company serves clients all throughout the Indianapolis area and beyond. Let us know what’s on your mind. We’re always happy to answer your questions or direct you to another professional with a different set of expertise. Give us a call at (317) 588-3131 and we’ll schedule a time to talk in more detail.