How can someone so small cause such major changes in your life? Not the least of which are financial challenges. The U.S. Department of Agriculture estimated that the average middle-income family will spend over $233,610 to raise a child born in 2015 until age 17, and about $372,210 for a family in the highest income bracket. This does not including college tuition, another significant expense. But with thoughtful planning and preparation, it's possible to manage costs and focus on the joys of parenthood.
Planning for Parenthood
Brace yourself. Your budget may be in for a shock with the cost of diapers, food, clothing, child care, strollers and more. If parenthood is part of your future, start planning financially for having a baby as soon as you can. Set aside as much as possible every month in a savings account. Remember that when your baby arrives, you'll likely have to change your health insurance coverage to protect them. The actual event of birth can be expensive, as can all the first-time purchases you'll make. According to a 2010 U.S. Department of Agriculture study, parents can expect to spend approximately $12,000 in child-related costs during the first year of their child's life.
Once you've saved enough for everyday expenses, consider putting remaining funds into a college account, for example in a 529 savings account. Thoroughly research all the items you need to purchase before the delivery. It will be extremely helpful to have most of what you need before the baby is born. Some of the essentials are a car seat, crib, bassinet, stroller, baby monitor and more. Another aspect to plan for is health care insurance for your new addition. Apart from the expense of childbirth, there will be pediatric care appointments in the weeks and months following.
One Income Versus Two
One of the hardest decisions for new parents is whether to have one parent stay at home full-time. As much as you wish it wasn't the case, this decision is often based on financial considerations. Here are some questions that might help guide your decision:
Maternity and Paternity Leave
Don't forget to save for your maternity or paternity leave. This is usually unpaid time off. Paid maternity and paternity leave is not required under federal law, though some employers may choose to provide paid leave. The Family and Medical Leave Act, which only applies if a company has more than 50 employees, ensures that mothers should be able to return to their old job or an equivalent job up to 12 weeks after they begin their leave. The actual policy varies from company to company, especially if the company has fewer than 50 employees.
If you are a father, ask your employer about paternity leave. The Family and Medical Leave Act does not cover such time off, but many employers offer the same or similar benefits to their male employees.
Child care can be one of the largest costs of raising a child. So the choice often comes to finding a balance between what’s affordable and the optimal setting in which your child will spend five days a week. Consider day care centers, family day care or hiring a nanny. Whichever option you choose for your child, always evaluate caretakers thoroughly and thoughtfully. Do your due diligence by looking up reviews online, asking around about the service and requesting references from the care provider.
While it introduces added expenses, there are financial advantages to having a child. As new parents, you have gained a dependency exemption you can deduct on your tax return. In addition to requesting a birth certificate, apply for a Social Security number for your child soon after the birth. That will make the baby official in the eyes of the IRS and is the first step to getting your deduction.
Who Is a Dependent?
There are five requirements that a person must meet to be your dependent.
Tax credits differ from deductions in that they don't just lower your taxable income; they actually directly lower the tax you owe. So a $1 tax credit will lower the tax you owe by $1.
If you pay for someone to take care of your child, a nanny for example, you may receive a tax credit equal to 20 to 30 percent (depending on your income) of qualified child care expense. This credit can be up to $2,400 for one child or $4,800 for two or more children.
Keep all payment records, including receipts, for all child care expenses. You will need them as proof of your expenses. Nursery school, private kindergarten, after-school programs and day care are all qualifying expenses. Visit IRS.gov to learn more about tax credits.
Flexible Spending Accounts
Some companies offer their employees Flexible Spending Accounts as a benefit. These accounts allow employees to have from $2,000 to $5,000 a year deducted from their paychecks pre-tax. This money can be spent on health care and child care for the family.
All these tax issues have complexities that are not covered here. To find out how you can benefit the most from federal tax laws, as well as the state and local tax laws that apply to you, ask a professional accountant for advice.