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Tax Tips For New Parents

April 1, 2006

Here is another excerpt from my book FOR THE LOVE OF MONEY.

1. Congratulations on your new bundle of joy? May “God Bless The Child,” (Billie Holiday, 1939). Make sure to get a social security number for your child. You want to be able to claim the “Light of Your Life” on your tax return. 

2. You can now claim a personal exemption (a $3,100 deduction, $3,200 for 2005) for your new beautiful child.

3. Do you have “Work To Do” (Vanessa Williams, 1992)? If you plan on going back to work, you will probably have daycare expenses. You may be able to deduct a tax credit, from $600 to $1,200 for some of your daycare expenses. To qualify, you must have daycare expenses for a child who is under 13 years of age (there is no age limit for special needs children). Note: Practically speaking, if you participate in your employer’s dependent care assistance plan, you may not be able to take this credit.

4. If you hire someone to watch your child as a nanny, you could have to pay the employment taxes (also called nanny taxes). This tax applies once you pay the nanny over $1,400 in a year. 

5. Are you a stay-at home mom? 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” to the rescue (SWV, 1992). You can contribute up to $3,000 ($4,000 for 2005) to a Traditional IRA and 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. Or, you can 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. 

6. 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 in 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.

7. You may be able to deduct the interest and points from a home improvement loan, where you use the proceeds for things like making additions to your house to help with your expanding family size. 

8. Having a baby can be expensive. You can deduct the medical expenses that you pay (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 a penny. Medical expenses are much more than doctor visits. They include things, like: child birth classes, prescription drugs, meals and lodging, mileage to and from doctor’s appointments (14 cents per mile for 2004 (15 cents per mile for 2005), and other transportation costs. 

9. Is your child adopted? You may be able to claim up to $10,390 in adoption tax credits based on your adoption costs, such as adoption fees, court costs, attorney fees, and travel expenses. 

10. Want more money in your paycheck? Consult your tax advisor before, or right after, your child is born to see if you should change the amount of tax withholding from your paycheck.

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