There are big moments in everyone’s life. A new birth is one of them. The irony is that most life events also have tax consequences attached to them. When a new member is added to your family or someone you know, here are some tips to consider.
Get A Social Security Number. Obtain a Social Security number for your new addition prior to filing your tax return. To fail to do so not only delays your tax filing, you can also be subject to a $50 penalty. So get this process started right away to avoid unneeded delays at the end of the year.
Prepare for the added exemption. Whether your child is born on the first day of the year or the last, you are entitled to claim an exemption on your tax return for the year. This amount is more than a rounding error:
2016 & 2017 Personal Exemption amount: $4,050
While the exemption can be phased out, most taxpayers will receive the full benefit for their new child. Recalculate your tax withholdings to adjust for this added deduction.
Put these tax benefits on your radar too. When recalculating your withholdings also account for common tax benefits that come with new dependents. The most common of these benefits includes the Earned Income Credit and the $1,000 Child Tax Credit.
Think funding. It is never too early to start building your little one’s net worth. You can provide gifts of up to $14,000 ($28,000 for married couple) each year in a savings or investment account. This strategy helps take advantage of the kiddie tax exemption for up to $2,000 of unearned income in your child’s name.
Dependent care help. There is also a Dependent Care Tax Credit for those who put their child in a qualified daycare while they work. First check for a pre-tax benefit of up to $5,000 from your employer as part of your employee benefit package. Even if it is not available through work, you can qualify for the credit by using your direct payments to the qualified daycare.
Consider their education. 529 College savings plans and other tax beneficial educational savings plans are worth considering. Virtually any relative or other adult can start saving tax-free money in your new child’s name. With the ever-higher cost of a college education this benefit is worth beginning as soon as possible.
New filing status? If you are married with a new addition, your filing status remains the same. However, if you are single with a new birth your filing status could be more beneficial to you if you qualify as a Head of Household filer.
Per the tax code, your new bundle of joy provides some joy to your tax situation as well.