Whether you’re a parent, grandparent, or just know someone who’s getting ready to welcome a new baby, there are a few general tax tips that everyone should be aware of. The more you know, the more you can save!
Improving Your Tax Situation When You Have Kids
There are plenty of challenges when it comes to raising children. But when you plan correctly, navigating your tax situation should be far from the toughest hurdle you’ll have to face. These tips can help you prepare for the future, and hopefully streamline your short-term tax responsibility along the way.
1. Make sure to review your tax withholding on Form W-4
The $2,000 Child Tax Credit will start with the birth of a new child, so it’s important to review your tax withholding each year to see how the numbers line up. You can take advantage of the credit now by lowering your withholdings. That way, your increased take-home pay can start to cover things like diapers and other expenses for your baby and any other children.
It’s also important to review and update your Form W-4, as needed, whenever your child tax credits start to fall off. The Dependent Care Credit only applies to children under the age of 13, and the Child Tax Credit goes away at age 17. Be sure to plan accordingly.
2. Consider starting up a 529 education savings plan
As long as the funds you put into these plans are used for eligible education expenses, you’ll be able to watch them grow and use them tax-free. They can even apply to elementary and secondary tuition. Even saving a little early on can maximize the amount of tax-free compound interest you earn. If you do end up waiting until age 18 to use the funds for college, the final result can be pretty significant.
Another key aspect of these plans is that although they are issued by states, you don’t necessarily need to stick with the plans offered by your home state. You can shop around and explore different options!
3. Try to use pre-tax money to pay for medical expenses
Taking care of a baby costs quite a lot of money. But so does having the baby. There’s also the matter of medical expenses for growing children throughout the year. Make sure you’re using the tax advantages to cover all of your predictable medical and dental expenses—it can really help you cut down on costs.
By using pre-tax money to pay for your out-of-pocket expenses, you can help lower your tax liability come tax time. If you haven’t already set up a Health Savings Account (HSA) or Flexible Savings Account (FSA), it’s worth checking with your employer to see if they offer a plan. Then start funding it as much as possible. Every bit counts.
Make the Most of Your Tax Benefits
Being a parent has specific tax benefits, so be sure you keep them top of mind! One way to stay informed is to partner with an experienced tax planner. That way, you can feel good knowing that nothing is getting overlooked.
Forward these tips to a parent you know, then please don’t hesitate to reach out to our team at NSO & Company if you’d like to schedule a tax planning session. We’re always happy to help families save on their taxes and get prepared for the year ahead, and beyond!