How to Plan for Tax Savings When Expecting a Baby

By Tom Nonmacher

Hello to all my fellow budget-conscious readers! I am here today to share some valuable insights for those of you who are expecting a new addition to your family soon. Yes, that's right! Today's topic is all about tax savings when expecting a baby. Becoming a parent is a joyous and exciting time, but it also comes with increased financial responsibility. Therefore, it is crucial to plan wisely and take advantage of every tax-saving opportunity available to you.

First of all, congratulations on your upcoming bundle of joy! As soon as your baby is born, they can be claimed as a dependent on your tax return. This is a significant tax break as for the tax year 2021, the federal income tax exemption per dependent is $500. This might not seem like a huge amount, but remember, every bit of savings helps when you're on a tight budget. And remember, this is an annual saving!

Next, let's talk about the Child Tax Credit. If you're earning less than $200,000 per year, or $400,000 for joint filers, you're eligible for the Child Tax Credit. For the tax year 2021, the Child Tax Credit has been increased to $3,000 per child over the age of six, and $3,600 for children under six. That's a substantial amount of savings right there!

Now, let's not forget about the Earned Income Tax Credit (EITC). Depending on your income and family size, you could qualify for this tax credit that could potentially save you thousands of dollars. For the tax year 2021, the maximum EITC amount available is $6,728 if you have three or more qualifying children. Keep in mind, to qualify for the EITC, both you and your spouse (if filing jointly) must have valid Social Security numbers, and you must also have earned income during the year.

Another thing to consider is the Child and Dependent Care Credit. If you pay for childcare so that you (and your spouse, if married) can work or look for work, you might qualify for this credit. For 2021, the amount of this credit can be up to $8,000 for one qualifying individual or $16,000 for two or more. This is a significant increase from previous years and an excellent opportunity for savings.

Lastly, don't forget about your healthcare expenses. If you have a High Deductible Health Plan, you might be able to contribute to a Health Savings Account (HSA) or a Flexible Spending Account (FSA) pre-tax. These accounts can be used to pay for eligible healthcare expenses, such as prenatal care and childbirth costs. The amount you can contribute to these accounts varies, but for 2021, the maximum you can contribute to an HSA is $3,600 for individuals and $7,200 for families.

Preparing for a new baby is a wonderful and busy time. But amidst all the excitement, don't overlook the potential tax savings that can help ease the financial burden. Remember, every dollar saved is a dollar earned. So, plan early, take advantage of these tax-saving opportunities, and let the savings help you provide the best for your little one. Happy parenting!

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