3 Tax Planning Tips for Parents-to-Be
My husband and I, both CPAs, are expecting a baby boy in August. Of course, being the fun-loving accountants that we are, as soon as we found out about the good news, we started thinking about tax planning for our new addition. Names, nursery theme, telling our family about the good news – those items could wait. But, tax planning, that was a today item.
I’ve been fortunate to work with many clients with children in my public accounting days, so I knew the general tax items that we needed to think about, such as tax credits, flexible spending accounts, household employee/nanny rules, etc. However, I wanted to refresh myself on these items and share some insights with anyone who has or will have a family. Here are some tips for you parents-to-be:
- Childcare. I was very interested in hiring a nanny to take care of our child while I work at home. But the idea of having a household employee (see Form 1040, Schedule H) that requires me to withhold taxes, pay unemployment insurance, file tax forms, etc., was above my administrative tolerance level. Plus, it is expensive to pay the employer’s share of FICA taxes and all other employee-related costs. So, I quickly realized that hiring a nanny agency versus the actual individual was the route for me, and one you may want to consider to save time and hassle. When a nanny’s employment is handled through an agency, the agency is responsible for issuing paychecks, paying the payroll tax and handling all employee-related matters.
- Dependent care FSA. Next, my mind was racing about tax benefits. Our dependent care FSA came to mind. An FSA allows taxpayers to make pre-tax contributions to a temporary savings account that can be used to pay eligible expenses. Childcare is an expensive endeavor, so if you can, max out the annual contribution (usually $5,000 per year for joint filers). Multiplying $5,000 by your incremental tax rate could yield a nice savings! The credit for child and dependent care expenses can also be a helpful benefit to parents. Publication 503, Child and Dependent Care Expenses, maps out all of the rules to help you determine whether you are eligible for this credit.
- College planning. It’s never too early to start planning for college. My husband and I want to give our baby boy every chance in the world for happiness and prosperity, and we believe education is the path to success. But, why not save a few bucks? Section 529 plans are an excellent method to do just that. A 529 plan is an educational savings plan administered by a state or educational institution that holds funds for future college costs. All investments grow tax-deferred and distributions to pay our little one’s tuition come out tax-free for federal purposes. My state (North Carolina) also exempts qualified distributions from income (other states provide similar incentives).
So, now that I’ve taken care of the urgent baby items (i.e., tax planning), I’ve had time to ponder other ideas, such as baby names and nursery theme. And in case you’re wondering, we have decided on Henry as his first name and monkeys as a nursery theme.
Susan Allen, CPA, Project Manager - Taxation, American Institute of CPAs. Susan serves AICPA members by developing targeted and up-to-date resources for their practice. She also is the staff liaison for the Tax Practice and Procedures Committee where she helps create checklists, practice aids and other material designed to help tax professionals work more effectively with the IRS. Susan has worked in both small and large public accounting firms, and served as the lead content writer/editor for a start-up tax software product. Susan holds a Master’s of Accounting from the University of North Carolina at Greensboro.
Baby image via Shutterstock