Are you new parents looking for some tax tips that will help save you $1,000’s of dollars come tax season? You’re in the right place.
Here is a list of things to think about as far as taxes are concerned. Hopefully they help ease your load a little.
I’ve created this list because I know that there are a lot of things happening before and after your baby arrives.
Make sure to take care of things sooner rather than later. It will be too little, too late by the time tax season rolls around.
Table of Contents
First Things First: Immediate Tax Tips for New Parents
Child Security Concerns: Freeze the child’s credit.
These days, getting a Social Security Number (SSN) is a fairly easy process. At the hospital you are asked if you want to apply for an SSN when providing information for the baby’s birth certificate.
If you say Yes, and provide the parents SSN number, the SSN is issued and mailed to your house.
Getting a SSN for your child is voluntary, but I recommend it so you can claim your child as a dependent and get the tax benefits I talk about below.
Criminals prey on the vulnerable, including children. They target a child’s SSN because their credit is not often checked by their parents, meaning the criminal could be long gone with as much money as they could get, long before it’s realized a crime even happened.
Now, the security part.
As a parent myself, I know you do everything to protect your child.
A good way to prevent identity theft of this manner from happening is by means of a credit freeze.
A credit freeze will make it so no one can check credit, meaning nothing can be put on their credit report and that companies cannot pull credit.
Exerpian, one of the three main credit reporting agencies, provides a detailed article on the steps needed to complete a credit freeze.
How to Lock Your Credit
Work Changes
Adjust Withholdings
Having a child will affect your taxes, often cutting how much you have to pay in taxes. This means that you probably don’t have to have as much taken out of your paycheck.
Remember that W-4 that you had to fill out when you were hired. Now, after the birth of your child, would be a good time to update that form.
Fund DCFSA, if available
DCFSA stands for Dependent Care Financial Savings Account. These are special accounts, similar to an HSA or FSA, offered by your employer. The DCFSA allows you to set aside money to pay for day care, or very specific costs for your child’s care when you have to go to work.
The money that flows through this account is not taxed, but there is a contribution limit of $5,000 for 2020. Also, it has to be used up every year.
Plan to save for education
There are several ways to save up for your child’s education, but I personally use a 529 plan. You can read all about it here: Should I Invest in a 529 College Savings Plan?
To give you a brief summary though, here are some of the highlights- Contributions grow tax free. (The contribution itself is not tax deductible.)
- 529’s can be used to pay for primary or secondary school.
Tax Credits vs Tax Deductions
Tax Credits vs Tax Deductions: What’s the difference?
Credits will directly decrease that amount of taxes you owe. For example, if you owe $10,000 in taxes and receive a $2,000 credit, you will now owe $8,000 in taxes.
Tax deductions indirectly reduce your taxes by decreasing how much of your income is taxed. For example, if you have taxable income of $100,000 and receive a $2,000 deduction, your taxable income becomes $98,000.
If you are in the 25% tax bracket, this would save you %25 of $2,000, or $500.
In summary, tax credits are more beneficial.
The Most Common Tax Tips for New Parents
Here are the most common tax credits & tax deductions that you will use as a parent.
Child Tax Credit
The Child Tax Credit will knock $2,000 off your tax bill for each dependent child you have, up to 16 years old.
Of that $2,000, $1,400 is refundable. This means if that amount of the tax credit exceeds the amount of income tax you have to pay; you will receive a refund for the difference.
This means you could potentially get paid for your child.
In order to qualify, your income must be under $200,000, or $400,000 if you are married filing jointly.
Child and Dependent Care Credit
If you paid for child care while working, you probably qualify for the Child Care Credit. Depending on your income, you can claim between 20-35% of what you paid for child care. The IRS has a table, but the percentage decreases as income goes up. If you made $43,000 or more, you can only claim 20%.
The max you can claim is $3,000 of one child, or $6,000 if you have more than one child.
If you have a DCFSA, this tax credit is not stackable. You can only claim the difference between your DCFSA contribution and the amount of Child Care Credit you qualify for.
Earned Income Tax Credit
The Earned Income Credit (EIC) is for those with low incomes. This means you don’t have to have a child to qualify. However, it is income based, and the income limit for those without children is extremely low.
The EIC income limit takes a significant jump with one child, and rises moderately for each additional child.
| 2019 EIC Income Limit | Max Credit | Joint-Filers | Single-Filers |
| No children | $529 | $21,370 | $15,370 |
| 1 child | $3,526 | $46,884 | $41,094 |
| 2 children | $5,828 | $52,493 | $46,703 |
| 3 or more children | $6,557 | $55,952 | $50,162 |
As you can see from the table, the EIC favors filling your taxes as a single person, as there is not much difference if filling married.
This is a generous credit, and it is refundable. It’s aimed at low income earners, so if you qualify there is a good chance you will be receiving a check when filing your taxes.
Less Common Tax Tips for New Parents
Let’s take a look at some of the less common options.
Adoption Credit
As the name suggests, this credit is for helping to offset the cost of adoption. The credit can be as much as $14,080, and starts phase out income reaches $211,160. It phases completely out at $251,160.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) is for helping to pay for the first four years of college, or other high education. The max credit is $2,500 per student, with $1,000 of the being refundable.
There is an income limit of $160,000 for married couples. Above that it starts to phase out. Once you make more than $180,000 you can’t claim the credit.
Final Tax Tip for New Parents
Fund a Roth IRA
If you child makes any sort of income, be sure to file a tax return for them.
This probably won’t happen for new born babies, but once they get out there and start mowing lawns or selling lemonade, file taxes.
Having earned income is a requirement for funding an IRA. Gifted money doesn’t count.
There are two types of IRAs, traditional and Roth. You can learn all about the difference by reading Roth vs Traditional IRAs: A Complete Reference Guide.
I would highly recommend the Roth IRA for two reasons.
- At this age because they are likely in a low tax bracket. Roth IRAs are not tax deductible, therefore its best to put money in when you are in a low tax-bracket. A tax-deduction on low income would be of little value.
- When they are ready to withdraw money from their Roth IRA, somewhere between age 55 and 59 and a half, most of the money in the Roth IRA will be growth thanks to compounding. And it will all be tax free,
If the money had been placed in a Traditional IRA, it would nearly all be taxable when taken out of the account.
Do you have any additional tax tips for new parents? Let me know in the comments below.
FIRE Away!