It’s that time of the year. As your W-2’s roll in, you are forced to start putting together your tax return. Tax laws are continuously changing (especially in the current economic environment). Hiring someone to give you tax advice is expensive and using software can be confusing. If you are a new parent (like myself) there are several different items that you need to consider when filling out your 2014 return (some of which are so new, you might not even know about them). Here is a list of the tops things that we have considered in our first year as new parents.
There is a lot more to planning for the birth of your first child than building a nursery and buying clothes. Consider your child’s future – along with the tax benefits that it can bring you. Ever heard of a 529 college savings plan? If it is your intent to send your child to college this is one of the best ways to save money in an investment type account that an be withdrawn tax-free for eduction purposes. In the state of North Carolina, $2,500 of annual contributions for a single tax filer ($5,000 joint) is considered an above the line exclusion from income. Every little bit helps. College costs are insane (and only going to get worse). Start planning now. This was one of the first things that we inquired about when we found out that I was pregnant with my first daughter. 529 plans can be set up as soon as your child has a social security number. Other relatives can also set up a 529 in your child’s name.
Flexible Spending Account (FSA)
This can be confusing. There are several pieces to consider here. If your company offers a Flexible Spending Account and you and your spouse file jointly it can be in your best interest to to contribute up to $5,000 into a Flexible Spending Account. The benefit of putting money into this account is that it is paid into the account tax free. It can be used to pay for your child’s day care expenses. The tax advantage – you are not paying tax on money that is going directly to your child’s daily living expenses. Day care is way too expensive. If you and your spouse are both working full time, you will blast through the $5,000 in no time. Keep in mind that if you don’t use all of the money in your FSA it does not roll over. These expenses also cannot be claimed on your tax return as part of the dependent care tax credit.
Child Tax Credit
A new child can yield a significant tax credit benefit for those that qualify (an additional $1,000 credit for each child). There are several scenarios that must be met in order for you to determine if your kids will qualify you for the credit. The biggest limitation on this credit for new parents is the family income test. If you and your spouse file jointly and make over $110,000, there is a phase out. For each $1,000 of income above $110,000, your available child tax credit is reduced by $50. That can add up quick.
Breast Pump Supplies
Wow, times have changed. Due to significant research that has shown the benefits of breast feeding, the government and our insurance companies have made it easier for new moms to purchase the equipment necessary to make the process easier. Moms – if you plan to breastfeed, it is in your best interest to first call you or your husband’s insurance company to find out if a hospital grade pump is covered. Mine was – 100%! As far as accessories, there are now tax advantages to cover these costs. You can use money set aside in your FSA (mentioned above), to purchase some pump attachments, bottles and storage. Check the details of your FSA account. If you use up all of your FSA account on childcare, it is possible that these supplies might meet the threshold for a medical expense tax deduction (see below).
If you had a particularly rough pregnancy/delivery, your medical expenses could be very high. If total allowable medical expenses exceed 10% of your adjusted gross income, you can claim a deduction. Any costs reimbursed by your insurance company do not count here. However, straight from the IRS, “You can include in medical expenses the cost of breast pumps and supplies that assist lactation.” The help of an accountant might be necessary if you feel you are getting close to meeting this requirement.
I am a CPA. This is easier written than understood. The main purpose of this post is to open your mind. The first few months after a baby is born are wild. Having an idea that this information is out there is a great way to start thinking about you and your child’s future. A lack of strategic long term planning can end up in disaster. Please let me know if you have any questions as you read through the information above. Happy tax season – let’s hope we are all getting refunds!