Tax Planning for New Parents

11/11/24 • 1 min

Welcoming a new baby is an exciting time, and it also brings new tax considerations. Let’s dive into some key tax planning tips for new parents. First, there’s the Child Tax Credit. For 2024, you can claim up to $2,000 per qualifying child under age 17. If your tax liability is less than the credit, you might be eligible for the Additional Child Tax Credit, which can provide a refund of up to $1,500 per child. Next, consider the Dependent Care Credit. If you pay for childcare so you can work or look for work, you may be eligible for a credit of up to 35% of your qualifying expenses, with a maximum of $3,000 for one child or $6,000 for two or more children. Don’t forget about medical expense deductions. You can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. This includes costs related to childbirth and your child’s medical care. Health Savings Accounts (HSAs) are another great tool. If you have a high-deductible health plan, you can contribute pre-tax dollars to an HSA, which can be used for medical expenses. Contributions, earnings, and withdrawals are all tax-free when used for qualified medical expenses. For your child’s future education, consider a 529 plan or other tuition savings plans. Contributions to a 529 plan may be deductible for state tax purposes, and withdrawals are tax-free when used for qualified education expenses. And here’s a fun fact: a child born at the end of the year “counts” for the whole year. This means you can claim the Child Tax Credit and other benefits for the entire year, even if your baby was born on December 31st. Consult your CPA to ensure you’re taking full advantage of these tax benefits and planning effectively for your family’s future.

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Tax Changes to Watch

As we look ahead to 2025, it’s important to be aware of significant tax changes on the horizon. Many provisions of the Tax Cuts and Jobs Act (TCJA), enacted in 2017, are set to expire at the end of 2025. Here’s what you need to know: First, individual income tax rates will revert to their 2017 levels. This means higher tax rates for many taxpayers. Additionally, the standard deduction will be cut roughly in half, and the personal exemption will return. The child tax credit will decrease, impacting families with children. The estate tax exemption will also be reduced, potentially affecting estate planning strategies. For small business owners, the 20% tax deduction for pass-through businesses will be eliminated. Another significant change is the removal of the cap on the state and local tax (SALT) deduction. This could provide some relief for taxpayers in high-tax states. For corporations, several temporary provisions will expire, including limits on deducting research and equipment costs and certain interest expenses. If these provisions are not extended, they will revert to pre-TCJA rules. It’s important to note that there will likely be legislative changes between now and then, which could alter these provisions. Staying informed and consulting with your tax advisor will help you navigate these changes and plan accordingly.

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Estate Planning and Taxes

Estate planning is essential for managing your financial future and minimizing tax liabilities for your heirs. Beyond gift giving, there are several strategies you can use to plan for estate taxes effectively. First, consider establishing trusts. Trusts like a Spousal Lifetime Access Trust (SLAT) allow one spouse to transfer assets to a trust for the benefit of the other spouse, providing access to the assets while removing them from the taxable estate. Charitable giving is another powerful tool. Setting up a charitable remainder trust (CRT) or a charitable lead trust (CLT) allows you to donate assets to a charity while still providing income to your beneficiaries or yourself for a period of time. Life insurance can also play a crucial role. Purchasing a policy within an irrevocable life insurance trust (ILIT) can help cover estate taxes, ensuring that your heirs receive the full value of your estate. For those with significant assets, Family Limited Partnerships (FLPs) can be beneficial. An FLP allows you to transfer assets to family members at a discounted value, reducing the overall taxable estate while maintaining control over the assets. Another strategy is upstream gifting, which involves gifting assets to older family members in lower tax brackets who can benefit from a stepped-up basis upon their death, reducing capital gains taxes for your heirs. Lastly, regularly review and update your estate plan with your CPA or estate planning advisor to ensure it aligns with current laws and your financial goals. This includes updating wills, trusts, and beneficiary designations. An important component of estate planning is understanding the Uniform Lifetime Exclusion. This exclusion allows individuals to transfer a certain amount of wealth, either through gifts during their lifetime or bequeathments after death, without incurring federal estate or gift taxes. For 2024, the lifetime exemption is $13.61 million per person, up from $12.92 million in 2023. For married couples, this amount doubles to $27.22 million. However, unless Congress acts, this exclusion is set to drop to approximately $7 million in 2026. By implementing these strategies and understanding the current and future tax laws, you can effectively manage your estate and minimize tax liabilities for your heirs. Always consult with your CPA or estate planning advisor to tailor these strategies to your specific situation.