As a new parent, sleepless nights aren’t the only thing that can be overwhelming. Taxes are probably last on your list of worries. However, parents are offered valuable tax breaks by the IRS that weren’t available to them before they welcomed a child. Kids are expensive and parents can often be blindsided by the unexpected costs – so it’s important to understand how having a baby can impact your obligations to the IRS.
Here are 4 essential tax tips for new parents:
1. Obtain a Social Security number for your baby
The only way the government will honor all your deductions and credits is having new parents confirm the child’s birth. Therefore, obtaining a Social Security number for your baby is crucial. Applying for your child’s Social Security number typically happens at the hospital right after the child is born. If you don’t deliver your baby at a hospital, you may need to visit your local Social Security Administration (SSA) office. At the SSA office, you need to complete the Form SS-5, the application, and provide the parents’ Social Security numbers, proof of the baby’s identity, age, and citizenship status. Birth or medical records, including a birth certificate, should be enough for your baby, while you’ll need your own passport, governmental ID or driver’s license.
2. Even if your baby was born on Dec. 31, 2019, you have tax credits for the entire year
Your new baby counts for the entire year. If this is your first child, it will be your first time claiming parental tax breaks, so it may be useful to hire a tax professional to help you navigate this new life milestone that comes with tax implications. If you use a tax preparation software, it should prompt you with a question about whether you welcomed a new baby during the tax year to help you identify the proper parental deductions and credits.
3. Consider changing your W-4
To ensure you don’t end up overpaying the IRS during the year, consider adjusting your withholdings to account for your new family situation. Ask your human resource department if you can fill out a new W-4 in order to reduce the amount withheld from each paycheck in taxes. This will allow for extra income to cover your new baby expenses.
4. Start saving for your child’s college fund now
Your baby may only be a few months old, but it’s nearly too early to start saving. Based on the current economic climate, college and education will continue to be a pricey expense. Consider opening a 529 plan account, which accumulates money for college tax-free and can be claimed as a deduction on your taxes or invest in an Education Saving Account. The money that you set aside for your child’s education is not taxed and you can contribute up to $2,000 each year.
A new baby can mean major changes in your taxes. So, understanding the IRS rules is important, especially if it’s your first child. We hope these tips help but you may also want to consider reaching out to a tax professional to maximize the tax savings available.
Crosslin’s tax team is happy to discuss this or any other tax issues. Please give us a call at 615.320.5500.