New parents have to make a number of adjustments to their lives. From dealing with diaper rash to sleep deprivation, they have a lot to deal with. But parenting duties are not limited to physical care of a child. There are numerous financial parenting tips that every new parent must consider. This article is intended to hit the high points on the list of financial and estate planning tasks that every new parent should consider.
1) Adjust Income Tax Withholdings.
The easiest and quickest way to get extra cash into a new parent’s hands is to adjust their income tax withholdings as soon as possible. A new child should allow a new dependency withholding exemption, assuming the child qualifies as a dependent of the parent. A taxpayer qualifies for a dependency exemption in the year of the dependant’s birth and for so long as the dependent continues to satisfy the definition of a “dependant” under Internal Revenue Code (“IRC”) § 152. The additional dependency exemption should work to reduce a parent’s required tax withholdings from his or her paycheck.
The parent should adjust his or her withholding certificate as soon as possible to take advantage of the new withholding exemption. The IRC allows for almost immediate adjustment to an employee’s withholding certificate. The IRC even allows prospective adjustments to withholding calculations if furnished before December 1 of the prior year under IRC § 3402(f)(2)(C). The sooner a parent’s withholding certificate is adjusted, the sooner his or her take home pay gets a much needed bump.
2) Identify Applicable Tax Breaks.
The IRS grants taxpayers several child related tax breaks, in addition to the dependency exemption under IRC § 151. Every parent should examine these tax benefits in calculating their income tax liability.
First, parents are granted a child tax credit of $1,000 under IRC § 24. The child must be a qualifying child under IRC § 152(c), but this definition should cover almost all children living with the parent and less than seventeen years old. The credit is allowable against the alternative minimum tax, but begins to phase out for joint return filers making more than $110,000. For single parents, the phase out starts at $75,000. The phase out is complete at $130,000 for joint filers and $95,000 for individuals. In limited cases, the credit can be refundable under IRC § 24(d).
Parents with less than $15,000 in adjusted gross income are entitled to a tax credit for amounts paid to care for children, if such expenses allow the parent(s) to continue gainful employment. This credit is equal to thirty-five percent of the expenses incurred in caring for a child, up to a maximum amount of $3,000 for one child or $6,000 for two or more children.
Adoptive parents of special needs children also have a special tax break designed solely for them. Under IRC § 23, adoptive parents of children who are less than eighteen years old and physically or mentally incapable of caring for themselves are entitled to a tax credit for adoption expenses of up to $10,000. This credit is subject to a phase out for high earners.
3) Review or Create an Estate Plan.
Most new parents don’t have an estate plan because they’ve never thought they needed one. In a sense they are right. Louisiana law generally provides a spouse substantial rights in the community property of a decedent during the surviving spouse’s lifetime if the couple has no children. For single people, property usually stays within their family at death. But, when children arrive, a will is a must.