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5 Tax Tips for New Families

Feb 26, 2019 | 3 min read | Ellen Stark

Key Takeaways

  • Revisit Medical Expenses: The income threshold has been lowered, even for 2018.
  • Proceed with Caution: Don’t adjust your withholding just yet until the new tax bill provisions shale out.
  • School Days: Maximize your 529 plan contributions, especially if you live in a high-tax state.

 

The Clarks welcomed their first child, a baby girl born in early July 2018. Now both Peter and Susan (not their real names) are back at work full-time, and baby Alexa has settled into day care.

During the fall debate about tax reform, the couple heard a lot about tax relief for families. As the 2018 filing season starts up, what will a growing family mean for their income taxes?

 


The arrival of a new child opens up a host of opportunities to save on your taxes, but mastering the rules is trickier than ever. That's because the sweeping tax bill that was signed into law in late 2017 changed many of the provisions that affect families to this day.

“As a new parent you face moving parts that never existed before," says Troy, Michigan financial advisor Leon LaBrecque. Here's how to master that planning:


Say goodbye to the personal exemption

As you prepare your 2018 tax return, you'll no longer have the opportunity to receive a personal exemption for your child. In 2017, that lowered your taxable income by $4,050, but it's no longer available.

The child tax credit, however, has doubled from 2017 levels to $2,000 for the 2018 tax year (a credit lowers your taxes dollar for dollar). For married couples filing jointly, the credit is reduced once your modified adjusted gross income (MAGI) hits $400,000.


Take advantage of child care tax credits

If you paid for day care or a nanny in 2018, you also may be eligible for the child and dependent care tax credit. Working parents can earn a credit worth as much as 35% of eligible care expenses, up to a maximum of $3,000 in expenses per child. This credit is also available if you pay for care of an elderly parent.

You'll need a Social Security number for your child to qualify for tax breaks, so make sure you've taken care of that by the filing deadline (April 15 this year).

 

Deduct your medical expenses

The tax bill also lowered the threshold for deducting unreimbursed medical expenses, and that change was retroactive to 2017. You can now write off out-of-pocket health care costs that exceed 7.5% of your adjusted gross income, vs. the previous 10% cut-off for many filers. That's still a high bar, but doctor and hospital bills for the birth of a child could put you over the top. This lower limit is effective through 2018 and then reverts to 10%.


Open an FSA to help with daycare costs

A new child also opens a tax-saving opportunity at work. Parents can set aside up to $5,000 in pre-tax money in a dependent care flexible spending account and then use those funds to pay for eligible childcare costs. You can't double dip and also claim the child and dependent care tax credit for the same funds, but with the average day care bill topping $10,000 a year (and the typical nanny nearly three times that expensive), chances are you can use both breaks.

Remember, though, that this is a use-it-or-lose-it account, so make sure to claim the full amount every year.


Maximize a 529 plan

It's never too early to plan for your new child's education costs, and tax reform has sweetened a popular tax-smart way to save. You can use a 529 state college savings plan to pay for private elementary and high school costs as well as college. You can't deduct your contribution on your federal tax return, but more than 30 states and the District of Columbia offer local tax breaks. No matter where you live, your money grows tax-free and withdrawals for qualified education expenses are tax-free too.

If you live in a high-tax state, the new tax rules make 529s even more appealing. Now that you can deduct no more than $10,000 in state and local taxes on your federal taxes, you have even more incentive to cut your state income tax bill, and a 529 can be one way to do that. In New York, for example, married couples can deduct up to $10,000 in 529 contributions; the max is $10,000 in Michigan, and $20,000 in Illinois.

“Literally start a 529 the day the baby is born," says Thompson, “especially if your state allows a deduction."

 

 

What you can do next

Make sure your newborn has a Social Security card; nothing, tax-wise, works without one of those.

Please consult your tax and legal advisors regarding your particular circumstances.

 

Ellen Stark has written and edited for publications such as Money magazine.

 

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