6 Key Tax Tips for New Parents
When you're a new parent, everything is overwhelming -- from figuring out how take care of your new baby to figuring out how to file your taxes with the new household addition. Luckily, here's a cheat sheet on what you should know when getting your paperwork together for tax season.
It goes without saying, but having a baby isn't cheap -- a fact that often blindsides new parents.
"New parents don't have a lot of extra money, and having a baby is a lot more expensive than they think it would be," says Ellie Kay, a Parents advisor for the Mom Money Clinic and a family financial expert. "I say that as the mother of seven."
With all the extra items to check off the to-do list once an infant joins the family, doing taxes is probably the last thing on a sleep-deprived mom or dad's mind. But by following these basic tax tips, couples who had a child in 2014 can save themselves quite a bit of money, which could be a lifesaver in these strapped-for-cash times.
1. Make sure your child has a social security number. Applying for one usually happens at the hospital right after the baby is born, but in some extenuating circumstances, filing the paperwork gets put off, Kay says. The only way for the government to honor all the deductions and credits new parents can claim is to confirm the child's birth, which is why the baby's social security number is so crucial.
2. File taxes early rather than wait until the last minute. This is no easy feat for busy new parents, but it's important. "Even though you might use a tax software or an accountant, human errors can still happen," Kay says. "When you're in a rush, you tend to make errors. That can add up to between several hundred and several thousand dollars on your tax return."
3. Have all your receipts in order. Collecting receipts might seem daunting with all the chaos that comes with having a baby, but if you've been filing them all year long, it should be doable to round them up at tax time. And you'll need them for any deductions you're claiming. "Have a good paper trail," Kay advises. "And if you've kept a digital paper trail, make sure you have it backed up."
4. Change your W-4. Consider filling a new W-4 that reduces how much is being withheld from your paycheck in taxes, suggests Elisabeth Leamy, a money expert and consumer correspondent for The Dr. Oz Show. "Now that you've got a dependent, child credits and deductions mean you're not going to owe as much at tax time, so you don't have to prepay as much tax throughout the year," she says.
5. Use a cash-back credit card to save a little extra money. "Money saved is tax-free," Leamy says. "Make saving money a goal. For exhausted new parents, a simple way to save is by using a cash-back credit card." She recommends the Citi Double Cash card, which gives 1 percent cash back when cardholders make a purchase and another 1 percent when they pay for it.
6. Start saving for your child's college now. It's never too early to put money aside for your child's college fund, according to both Leamy and Kay. Open a 529 plan account, which accumulates money for college tax-free and can be claimed as a deduction on your taxes. Or try investing in a Coverdell Education Savings Account (ESA), Leamy advises. The money is also not taxed, and parents can contribute up to $2,000 a year.