How to Plan for Tax Savings When Expecting a Baby

By Tom Nonmacher

Hello, savvy savers! Today I'm going to take you on a little journey into the world of tax planning. But, this isn't just any tax planning conversation. Today, we're talking about how to plan for tax savings when you're expecting a baby. That's right, those little bundles of joy can also bring some financial benefits, and I'm here to help you uncover them.

Now, having a baby is an exciting time in anyone's life. It's also a time of significant financial change. There are strollers, cribs, diapers, clothes, and so much more to think about. But, tucked away in the whirlwind of planning and preparing for your new arrival, there are tax savings to be found. With a bit of strategic planning, you can maximize these savings and give your budget a much-needed boost.

First, let's talk about the Child Tax Credit. This is a potential goldmine for new parents. For the tax year 2021, the Child Tax Credit has been increased to $3,600 for children under the age of 6 and $3,000 for children aged 6 to 17. This credit is fully refundable, which means you could receive the full amount as a refund, even if you owe no tax. That's a significant chunk of change that could go a long way to offsetting the costs of your new arrival.

Next, consider setting up a 529 plan for your child's future education expenses. Contributions to a 529 plan are not deductible on your federal tax return, but the earnings grow tax-free. Plus, many states offer a state income tax deduction or credit for 529 contributions. It's a great way to save for your child's future and potentially lower your tax bill.

Also, let's not forget about the Earned Income Tax Credit (EITC). If you're a low-to-moderate-income working person, having a child might qualify you for the EITC. The amount of the EITC depends on your income and the number of children you have, but it could be worth up to $6,728 for tax year 2021. That's another substantial saving that could make a big difference to your family's budget.

Lastly, if you're a working parent, you might be eligible for the Child and Dependent Care Credit. This can be worth up to 35% of your qualifying costs for care, allowing you (and if applicable, your spouse) to work or look for work. The maximum amount of care expenses you're allowed to claim is $3,000 for one person or $6,000 for two or more.

Remember, every little bit helps when it comes to financial planning for a new baby. Tax planning might not be the most glamorous part of preparing for your new arrival, but it's an essential step in ensuring your family's financial stability. And here at eTHRIFT.net, we're all about helping you save, plan, and thrive. So, congratulations on your upcoming addition, and happy tax planning!

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