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It’s spring time, and it seems like everybody is having babies -- Pop Stars: Brittney Spears, Gwen Stefani, and Seal; Actors: Cuba Gooding Jr., Gwyneth Paltrow, and Jennifer Beals: Comedian, Mo’Nique; World Mogul, Donald Trump: and even British Child Psychiatrist, Dr. Patricia Rashbrook, at 62 years old, is in her third trimester. Did I miss the invitation for “get busy night?”
Even more bizarre are people who battle it out in the media, and then happen to have babies on the same day! Who can forget Tom Cruise and his biting words against Brooke Shields and her use of anti-depressant drugs to treat postpartum depression? Fast forward 11 months later, and they both had baby girls on the same day. And most recently, both Shaq and Kobe also added baby girls, within six minutes of the other, to their families (Shaq already had six kids, and this makes number two for Kobe).
In honor of all these babies, and those without celebrity parents, I’m offering tax and finance tips for new parents in this column. Not that these celebs necessarily need it, but you might!
1. Congratulations on your new bundle of joy! Make sure to get a social security number for this child, who will “Always Be My Baby,” (Mariah Carey, 1996). This is the only way to claim your child on your tax return. Try http://www.ssa.gov/pubs/10002.html for more information.
2. Listen up, all you baby Daddies and Mamas. You may be living the “Single Life” (Cameo, 1985), but this new child may mean you can file as “head of household.” Keep in mind that only one person can claim head of house hold status for this child. That will be the person who provides more than half the costs of keeping a home for the child. Remember, your filing status can have a big impact on the amount of taxes you actually have to pay. Why? Because some of your tax deductions and credits are based on your filing status. In most cases, if you file as head of household, your taxes will be lower and your standard deduction will be higher than single status or married filing separately.
3. Don’t forget, you can claim a tax deduction for each child – to the tune of $3,300.
4. Do you have “Work To Do” (Vanessa Williams, 1992)? If you plan on going back to work after your new baby, you will probably have daycare expenses. You may be able to deduct a tax credit, from $600 to $1,050, for some of your daycare expenses. Or, if your employer offers a flexible spending account program, you can put away up to $5,000, tax-free to pay your daycare expenses.
5. Remember the song, “Go See the Doctor,” by Kool Moe Dee (1986), or “Operator” (“…this is an emergency...”) by Midnight Star (1984)? Having a baby meant you spent a lot of time with medical issues. You can deduct the medical expenses that you paid (after reimbursements from insurance), if they are over 7.5% of your adjusted gross income. This basically means, if you make $50,000, you must have medical expenses greater than $3,500 before you can deduct one penny. Medical expenses are much more than just doctor visits. They include things, like: child birth classes, prescription drugs, meals and lodging, mileage to and from doctor’s appointments (15 cents per mile), and other transportation costs.
6. The hits keep coming! Did you know you can get a tax credit just for having a child too? That’s right, you may be able to deduct $1,000 for each child under the age of 17.
7. Thanks to all these great tax deductions and credits, you may be able to get more money in your paycheck. Look into changing the amount of withholding exemptions on Form W-4 with your employer. Check out, http://www.paycheckcity.com/w4/w4instruction.asp or
http://www.taxbrain.com/taxcenter/w4calculator.asp for online employment calculators to see how this might work for you.
8. Are you going to be a stay-at home parent now? You may not miss many things about your J-O-B, but you did like the tax advantages of your 401(k). Well have no fear – the homemaker IRA is “Right Here,” (SWV, 1992) to the rescue. You can contribute up to $4,000 to a Traditional IRA, take a tax deduction for this contribution, and the earnings grow tax-free. You pay taxes when you take the money out after age 59½. You can also contribute the same amount to a Roth IRA (but, you don’t get a tax deduction). Again, the earnings grow tax-free, but this time when you take the money out after 59½, you pay no taxes.
9. Start saving for your child’s education now. There are several tax-advantaged plans you can use (like 529 Plans or, Coverdell Education Savings Accounts). The money you put into the plan grows tax-free, and you pay no taxes when you take it out; as long as the money goes to pay for your child’s education expenses. You can start some of these plans with as little as $50 a month. Remember, every little bit will help save your child from having large student loans.
10. Get out of debt, now, while your child is young. This is a good time to break old habits and start new ones. You can start by getting a free copy of your credit report and then finding out your credit score. Next, come up with a plan to pay off each creditor – either in full using a payment plan or a partial lump-sum payment to settle the account. Check out https://www.annualcreditreport.com for more information.
11. You need adequate insurance coverage. This means health, life and disability insurance. Aim for life insurance coverage at about 10 times your salary, and disability insurance at about 60% of your salary. You never know when “Danger,” (Mystikal, 2000) might strike. This will allow you to at least keep the mortgage covered and daycare expenses paid. Check out www.accuquote.com.