Every stage of life has its own financial needs and concerns. The life events on this page can help you target the key financial strategies and issues that are likely to be most important to you in this stage of your life.
- Preparing for Parenthood
- Life Insurance at Various Life Stages
- Planning a Family? Get to Know Your Health Insurance Policy
- Investing for Major Financial Goals
- Tax-Advantaged Ways to Save for College
- Saving for Retirement and a Child's Education at the Same Time
- Estate Planning: An Introduction
- Wills: The Cornerstone of Your Estate Plan
- How can I save for my child's college education?
- Who should I name as guardian of my children in case my spouse and I should die at the same time?
- Should I buy life insurance on my child?
- How do I find quality child care?
- Does it make sense financially for both me and my spouse to work after our child is born?
- How do I pay for child care?
- When do I have to apply for a Social Security number for my newborn?
- What is the kiddie tax?
- What is the earned income credit and who qualifies for it?
- Can I take the tax credit for child care?
- What is the child tax credit?
- After my child is born, doesn't the law say I'm entitled to three months of leave?
- What is the difference between the child tax credit and the child and dependent care tax credit?
Preparing for Parenthood
So you’re about to become a parent. Congratulations! Parenthood may be one of the most rewarding experiences you’ll ever have. As you prepare for life with your baby, here are a few things you should think about.
Reassess your budget
You’ll have to buy a lot of things before (or soon after) your baby arrives. Buying a new crib, stroller, car seat, and other items you’ll need could cost you well over $1,000. But if you do your homework, you can save money without sacrificing quality and safety. Discount stores or online retailers may offer some items at lower prices than you’ll find elsewhere. If you don’t mind used items, poke around for bargains at yard sales and flea markets. Finally, you’ll probably get hand-me-downs and shower gifts from family and friends, so some items will be free.
Buying all of the gear you need is pretty much a one-shot deal, but you’ll also have many ongoing expenses that will affect your monthly budget. These may include baby formula and food, diapers, clothing, child care (day care and/or baby-sitters), medical costs not covered by insurance (such as co-payments for doctor’s visits), and increased housing costs (if you move to accommodate your larger family, for example). Redo your budget to figure out how much your total monthly expenses will increase. If you’ve never created a budget before, now’s the time to start. If it looks like the added expenses will strain your budget, you’ll want to think about ways to cut back on your expenses.
Review your insurance needs
You may incur high medical expenses during the pregnancy and delivery, so check the maternity coverage that your health insurance offers. And, of course, you’ll have another person to insure after the birth. Good medical coverage for your baby is critical, because trips to the pediatrician, prescriptions, and other health-care costs can really add up over time. Fortunately, adding your baby to your employer-sponsored health plan or your own private plan is usually not a problem. Just ask your employer or insurer what you need to do (and when, usually within 30 days of birth or adoption) to make sure your baby will be covered from the moment of birth. An employer-sponsored plan (if available) is often the best way to insure your baby, because these plans typically provide good coverage at a lower cost. But expect additional premiums and out-of-pocket costs (such as co-payments) after adding your baby to any health plan.
It’s also time to think about life insurance. Though it’s unlikely that you’ll die prematurely, you should be prepared anyway. Life insurance can protect your family’s financial security if something unexpected happens to you. The death benefit can be used to pay off debts (e.g., a mortgage, car loan, credit cards), support your child, and meet other expenses. Some of the funds could also be set aside for your child’s future education. If you don’t have any life insurance, now may be a good time to get some. The cost of an individual policy typically depends on your age, your health, whether you smoke, and other factors. Even if you already have life insurance (through your employer, for example), you should consider buying more now that you have a baby to care for. An insurance agent or financial professional can help you figure out how much coverage you need.
Update your estate plan
With a new baby to think about, you should update your will (or prepare a will, if you haven’t already) with the help of an attorney. You’ll need to address what will happen if an unexpected tragedy strikes. Who would be the best person to raise your child if both parents die? If the person you choose accepts this responsibility, you’ll need to designate him or her in your will as your minor child’s legal guardian. You should also name a contingent guardian, in case the primary guardian dies. Guardianship typically involves managing money and other assets that you leave your minor child. You may also want to ask your attorney about setting up a trust for your child and naming trustees separate from the suggested guardians.
While working with your attorney, you should also consider completing advance medical directives. These documents allow you to designate someone to act on your behalf for medical and financial decisions if you should become incapacitated.
Start saving for your little one’s education
The price of a college education is high and keeps getting higher. By the time your baby is college-bound, the annual cost of a good private college could be almost triple what it is today, including tuition, room and board, books, and so on. How will you afford this? Your child may receive financial aid (e.g., grants, scholarships, and loans), but you need to plan in case aid is unavailable or insufficient. Set up a college fund to save for your child’s education. You can arrange for funds to be invested in the account(s) that you choose. You can also suggest that family members who want to give gifts could contribute directly to this account. Start as soon as possible (it’s never too early), and save as much as your budget permits. Many different savings vehicles are available for this purpose, some of which have tax advantages. Talk to a financial professional about which ones are best for you.
Don’t forget about your taxes
There’s no way around it: Having children costs money. However, you may be entitled to some tax breaks that can help defray the cost of raising your child. You may qualify for one or more child-related tax credits: the child tax credit, the child and dependent care credit (if you have qualifying child-care expenses), and the earned income credit (if your annual income is below a certain level). For more information about tax issues, talk to a tax professional.
Life Insurance at Various Life Stages
Planning a Family? Get to Know Your Health Insurance Policy
Planning_a_Family_Certified Wealth Management & Investment
Investing for Major Financial Goals
Tax-Advantaged Ways to Save for College
Saving for Retirement and a Child’s Education at the Same Time
You want to retire comfortably when the time comes. You also want to help your child go to college. So how do you juggle the two? The truth is, saving for your retirement and your child’s education at the same time can be a challenge. But take heart — you may be able to reach both goals if you make some smart choices now.
Know what your financial needs are
The first step is to determine your financial needs for each goal. Answering the following questions can help you get started:
- How many years until you retire?
- Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what’s your balance? Can you estimate what your balance will be when you retire?
- How much do you expect to receive in Social Security benefits? (One way to get an estimate of your future Social Security benefits is to use the benefit calculators available on the Social Security Administration’s website, www.ssa.gov. You can also sign up for a my Social Security account so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor’s, and disability benefits.)
- What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?
- Do you or your spouse expect to work part-time in retirement?
- How many years until your child starts college?
- Will your child attend a public or private college? What’s the expected cost?
- Do you have more than one child whom you’ll be saving for?
- Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
- Do you expect your child to qualify for financial aid?
Many on-line calculators are available to help you predict your retirement income needs and your child’s college funding needs.
Figure out what you can afford to put aside each month
After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you’ll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you’ve come up with a dollar amount, you’ll need to decide how to divvy up your funds.
Retirement takes priority
Though college is certainly an important goal, you should probably focus on your retirement if you have limited funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you’ll miss out on years of potential tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there’s no such thing as a retirement loan!
If possible, save for your retirement and your child’s college at the same time
Ideally, you’ll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child’s college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8% annually, you’d have $18,415 in your child’s college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment. Investment returns will fluctuate and cannot be guaranteed.)
If you’re unsure about how to allocate your funds between retirement and college, a professional financial planner may be able to help. This person can also help you select appropriate investments for each goal. Remember, just because you’re pursuing both goals at the same time doesn’t necessarily mean that the same investments will be suitable. It may be appropriate totreat each goalindependently.
Help! I can’t meet both goals
If the numbers say that you can’t afford to educate your child or retire with the lifestyle you expected, you’ll probably have to make some sacrifices. Here are some suggestions:
- Defer retirement: The longer you work, the more money you’ll earn and the later you’ll need to dip into your retirement savings.
- Work part-time during retirement.
- Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.
- Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.
- Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss). Note that no investment strategy can guarantee success.
- Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
- Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don’t feel guilty — a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
- Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.
Can retirement accounts be used to save for college?
Yes. Should they be? That depends on your family’s circumstances. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child’s college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to. With IRAs, you can withdraw money penalty free for college expenses, even if you’re under age 59½ (though there may be income tax consequences for the money you withdraw). But with an employer-sponsored retirement plan like a 401(k) or 403(b), you’ll generally pay a 10% penalty on any withdrawals made before you reach age 59½ (age 55 or 50 in some cases), even if the money is used for college expenses. You may also be subject to a six-month suspension from plan participationif you make a hardship withdrawal in 2017. There may be income tax consequences, as well. (Check with your plan administrator to see what withdrawal options are available to you in your employer-sponsored retirement plan.)
Estate Planning: An Introduction
By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you’ll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you’ll need to use more sophisticated techniques in your estate plan, such as a trust.
To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek professional advice to implement the right plan for you.
Since incapacity can strike anyone at anytime, all adults over 18 should consider having:
- A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.
- An advance medical directive: The three main types of advance medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.
Young and single
If you’re young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don’t, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).
You’ve committed to a life partner but aren’t legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you may consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.
For many years, married couples had to do careful estate planning, such as the creation of a credit shelter trust, in order to take advantage of their combined federal estate tax exclusions. For decedents dying in 2011 and later years, the executor of a deceased spouse’s estate can transfer any unused estate tax exclusion amount to the surviving spouse without such planning.
You may be inclined to rely on these portability rules for estate tax avoidance, using outright bequests to your spouse instead of traditional trust planning. However, portability should not be relied upon solely for utilization of the first to die’s estate tax exclusion, and a credit shelter trust created at the first spouse’s death may still be advantageous for several reasons:
- Portability may be lost if the surviving spouse remarries and is later widowed again
- The trust can protect any appreciation of assets from estate tax at the second spouse’s death
- The trust can provide protection of assets from the reach of the surviving spouse’s creditors
- Portability does not apply to the generation-skipping transfer (GST) tax, so the trust may be needed to fully leverage the GST exemptions of both spouses
Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (but a $152,000 annual exclusion, for 2018, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.
Married with children
If you’re married and have children, you and your spouse should each have your own will. For you, wills are vital because you can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them.
You may also want to consult an attorney about establishing a trust to manage your children’s assets in the event that both you and your spouse die at the same time.
You may also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.
Comfortable and looking forward to retirement
If you’re in your 30s, you may be feeling comfortable. You’ve accumulated some wealth and you’re thinking about retirement. Here’s where estate planning overlaps with retirement planning. It’s just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).
Wealthy and worried
Depending on the size of your estate, you may need to be concerned about estate taxes.
For 2018, $11,180,000 is effectively excluded from the federal gift and estate tax. Estates over that amount may be subject to the tax at a top rate of 40 percent.
Similarly, there is another tax, called the generation-skipping transfer (GST) tax, that is imposed on transfers of wealth made to grandchildren (and lower generations). For 2018, the GST tax exemption is also $11,180,000, and the top tax rate is 40 percent.
The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the gift and estate tax basic exclusion amount and the GST tax exemption to $11,180,000 in 2018. After 2025, they are scheduled to revert to their pre-2018 levels and cut by about one-half.
Whether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.
Elderly or ill
If you’re elderly or ill, you’ll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.
Wills: The Cornerstone of Your Estate Plan
If you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you’re young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them. Although a will doesn’t have to be drafted by an attorney to be valid, seeking an attorney’s help can ensure that your will accomplishes what you intend.
Wills avoid intestacy
Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This “intestate’s will” distributes your property, in general terms, to your closest blood relatives in proportions dictated by law. However, the state’s distribution may not be what you would have wanted. Intestacy also has other disadvantages, which include the possibility that your estate will owe more taxes than it would if you had created a valid will.
Wills distribute property according to your wishes
Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose. There are some limits, however, on how you can distribute property using a will. For instance, your spouse may have certain rights with respect to your property, regardless of the provisions of your will.
Gifts through your will take the form of specific bequests (e.g., an heirloom, jewelry, furniture, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what’s left after your other gifts.
Wills allow you to nominate a guardian for your minor children
In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children’s assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.
Wills allow you to nominate an executor
A will allows you to designate a person as your executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries. Like naming a guardian, the probate court has final approval but will usually approve whomever you nominate.
Wills specify how to pay estate taxes and other expenses
The way in which estate taxes and other expenses are divided among your heirs is generally determined by state law unless you direct otherwise in your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.
Wills can create a testamentary trust
You can create a trust in your will, known as a testamentary trust, that comes into being when your will is probated. Your will sets out the terms of the trust, such as who the trustee is, who the beneficiaries are, how the trust is funded, how the distributions should be made, and when the trust terminates. This can be especially important if you have a spouse or minor children who are unable to manage assets or property themselves.
Wills can fund a living trust
A living trust is a trust that you create during your lifetime. If you have a living trust, your will can transfer any assets that were not transferred to the trust while you were alive. This is known as a pourover will because the will “pours over” your estate to your living trust.
Wills can help minimize taxes
Your will gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.
Assets disposed of through a will are subject to probate
Probate is the court-supervised process of administering and proving a will. Probate can be expensive and time consuming, and probate records are available to the public. Several factors can affect the length of probate, including the size and complexity of the estate, challenges to the will or its provisions, creditor claims against the estate, state probate laws, the state court system, and tax issues. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate. Generally, real estate is probated in the state in which it is located, and personal property is probated in the state in which you are domiciled (i.e., reside) at the time of your death.
Will provisions can be challenged in court
Although it doesn’t happen often, the validity of your will can be challenged, usually by an unhappy beneficiary or a disinherited heir. Some common claims include:
- You lacked testamentary capacity when you signed the will
- You were unduly influenced by another individual when you drew up the will
- The will was forged or was otherwise improperly executed
- The will was revoked
How can I save for my child’s college education?
This is a very broad question that’s difficult to answer without knowing your individual situation. The option(s) you choose will depend on a number of factors:
- Your need for strategies with tax advantages (some investments and savings vehicles offer special tax advantages if the money is used to pay college expenses)
- The number of years you have to invest
- The amount of money you have available to invest
- Your income (some savings vehicles exclude parents above certain income limits)
- Your willingness to put funds in your child’s name
- Your risk tolerance
- Your expectation of qualifying for financial aid
It may be helpful to consult a professional financial planner or tax advisor to determine the best option for your particular situation.
Yet there is one universal truth: You should start saving for your child’s college education as early as possible, preferably with regular monthly contributions that increase over time.
But what if your child is only a couple of years away from college? Your emphasis then won’t be on a savings program so much as it will be on what assets, if any, you might use for college expenses. Do you have retirement accounts? A cash value life insurance policy? Home equity? These are all sources of potential funds.
Who should I name as guardian of my children in case my spouse and I should die at the same time?
This is an extremely important question. After all, what can be more important than choosing a surrogate parent for your minor children? This process takes careful consideration and may be emotionally difficult, so you’ll want to take your time. The best guardian may not be the obvious choice.
You generally name a guardian in your will. Of course, spouses typically name each other as guardian first and then name an alternate guardian or guardians in case the spouse cannot serve for any reason, including death. Some parents nominate one guardian or guardians to care for the children and a different guardian to care for the children’s assets and finances. All of this is perfectly permissible. The court will have final approval but generally gives your selection the highest regard.
Who is the right guardian for your children? It’s customary for people to name parents, siblings, or best friends. You should select a responsible person with good character who shares your values and has the time and willingness to take on the job. When choosing a guardian, some of the things you may want to consider are:
- Who loves and cares about your children?
- Who do your children love and respect?
- Who do you trust?
- Who is financially and emotionally able to take on the responsibility?
- Who is willing to take on the responsibility?
Be sure to talk with any prospective guardian before you nominate that person. Impress upon him or her the gravity of your request. Discuss your wishes regarding how you want your children to be raised (e.g., you want them to have a religious upbringing, or you want them to go to college) and what financial resources will be available (e.g., you have life insurance). Give the potential guardian plenty of time to think over your request carefully.
Should I buy life insurance on my child?
Since the main purpose of life insurance is to protect against financial loss when someone dies, it’s often better to wait until your child reaches adulthood to purchase life insurance. Although your child’s death would be a tragedy, it would probably not affect your family much financially unless he or she was earning a substantial amount of income for the family.
However, there are a few reasons why you might purchase life insurance on your child. For instance, you might buy life insurance on your young child so you can take advantage of the rates, which are lower for healthy children than for adults. Your employer may even offer inexpensive term coverage for dependents. Purchasing a policy while your child is healthy can also guarantee that your child will be protected throughout adulthood, even if he or she becomes ill, works in a hazardous occupation, engages in dangerous activities, or becomes uninsurable for other reasons.
Some parents also buy term insurance policies on their children to cover the time period when they are paying for their children to attend college or graduate school. If a child dies during this period, the death benefit can be used to help pay off college debt.
To find out if buying life insurance for your child makes sense in your situation, talk to a trusted insurance advisor.
How do I find quality child care?
Whether you’re looking for a nanny, a family day-care provider, or a child-care center, you’ll want to make sure that your child will be safe and happy in his or her day-care setting.
Start by asking your friends, family members, and neighbors for referrals to child-care providers that they’ve been happy with. You can also call Child Care Aware at (800) 424-2246 to find the Child Care Resource and Referral program nearest you. When you call your local program, you’ll be referred to child-care providers in your area and given information about selecting a child-care provider, including information about how your state regulates child care.
Once you’ve compiled a list of providers, visit each one that seems suitable. If possible, bring your child so that you can see how the provider interacts with your child. During the visit, look for signs that the home is clean and safe, and that the children who stay there seem happy.
Finally, ask the provider for references from other parents, and call them. It’s also essential to check state records to see if any complaints have been lodged against the provider.
Does it make sense financially for both me and my spouse to work after our child is born?
Following the birth of your child, you may feel that both you and your spouse need to work to meet household expenses and maintain your current lifestyle. However, you may discover that one of you can stay home without seriously affecting your net income. Though you would have to do without a second income, you need to factor in what you’d save:
- Child-care costs: The cost per child for a day-care facility, nursery school, or nanny
- Commuting costs: Gasoline, wear and tear on your car, tolls, and parking
- Clothing: Work clothes and dry cleaning
- Restaurant and take-out food: Prepared dinners you purchase because you have no time to cook
- Lunches out: You have more time to prepare your own
- House cleaning and gardening: Hired help to clean the house and mow the lawn
- Taxes: With only one salary, you may move into a lower tax bracket
Now, consider the adverse effects of becoming a single-income household. The most obvious, of course, is a reduced family income. You should also consider what effect a leave of absence will have on the stay-at-home spouse’s career and your family’s retirement plans. You may both be at a point in your careers where you are earning high salaries. Leaving your job now may mean having to start over lower on the career ladder. And if one of you leaves work, you may miss the opportunity to fully fund your employer-sponsored retirement plan. Further, with only one income, you are more vulnerable in the event of an economic downturn. Finally, the stay-at-home spouse may lose the sense of accomplishment and community one gets from working outside the home.
You should balance all the issues, both pro and con. And remember, although it may make sense for both of you to continue working, some nonfinancial considerations, such as the opportunity to raise and supervise your child in your own home, may outweigh your financial concerns.
How do I pay for child care?
If you are like many working people with children, you commonly pay for your child-care costs out of current cash flow, including income from salaries, tips, investments, and other sources. Child care is part of your regular monthly expenses and generally cannot be avoided. However, some methods are available to you that may help save on taxes and reduce costs. For instance, your employer may include a designated flexible spending account (FSA) in its employee benefits package. You contribute pretax dollars, deducted from your paycheck, to a fund earmarked for dependent care expenses. You pay your day-care bills and are later reimbursed out of your tax-free FSA.
You and your spouse can more easily meet your child-care expenses by reducing costs. Some child-care providers allow parents to volunteer their services in exchange for a lower bill. Or, if possible, you and your spouse can work alternate work schedules so that at least one of you is home with your child for all or part of the day. This will allow you to pay for part-time day care or to fully avoid such costs. Other alternatives include job sharing, where you and another person fill one full-time job, allowing more free time to spend at home; telecommuting, where you work some days at home; or a compressed work week, where you work four 10-hour shifts during the week and spend the fifth day at home. You might also consider working part-time for a few years until your child is in school. If you work part-time, you could try to create a child-care swap with other neighbors who work part-time. In addition, some companies provide up to three months of paid parental leave time, so take full advantage if this is available to you.
When do I have to apply for a Social Security number for my newborn?
There’s no time limit on applying for a Social Security number for your newborn. However, you may want to do it right away, because you’re required to include a child’s Social Security number on your tax return to claim that child as a dependent.
There are two ways to apply for a Social Security number for your newborn. The first is to apply at the hospital when the baby is born. A doctor or hospital representative will ask for information to complete your baby’s birth certificate. Ask him or her to have your state’s vital statistics office share this information with the Social Security Administration. You’ll need to provide the Social Security number for each parent, although the application can proceed even if one parent’s number is unknown or not available. Your baby’s card will be mailed to you within a few weeks.
If you do not apply for the Social Security card at the hospital, you can apply for the baby’s number at a Social Security Administration office. You’ll need to fill out an application (Form SS-5). Generally, you’ll need to do the following:
- Provide both parents’ Social Security numbers
- Show evidence of your child’s age (the birth certificate), identity (a hospital record other than the birth certificate), and citizenship (the birth certificate)
- Show evidence of your identity (a driver’s license or passport)
To obtain a copy of Form SS-5, access the Social Security Administration website or call toll free at (800) 772-1213 to request one. Mail or hand deliver the completed application to your local Social Security Administration office.
What is the kiddie tax?
Special rules commonly referred to as the “kiddie tax” rules apply when a child has unearned income (for example, investment income). In 2018, children subject to the kiddie tax are generally taxed using trust and estate income tax brackets on any unearned income over a certain amount. Prior to 2018, children subject to the kiddie tax were generally taxed at their parents’ tax rate on any unearned income over a certain amount. For 2017 and 2018, this amount is $2,100 (the first $1,050 is tax free and the next $1,050 is taxed at the child’s rate). The kiddie tax rules apply to (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support.
In some cases, a parent had the option of reporting the child’s unearned income on his or her tax return in 2017. In other cases, the child had to file his or her own return. Each method of filing had several advantages and disadvantages.
Note that the kiddie tax rules apply regardless of whether the child is your dependent. Further, the definition of a child includes your legally adopted child and your stepchild.
You should note that a child who has significant tax exempt interest, or tax preferences or adjustments, may be subject to the alternative minimum tax.
What is the earned income credit and who qualifies for it?
The earned income credit (EIC) is a refundable tax credit available to certain low-income individuals who have earned income, meet adjusted gross income thresholds, and do not have more than a specified amount of disqualified income (excess investment income). If you file a federal tax return and meet all applicable requirements, your income tax (if any) will be reduced and you might receive a refund.
To qualify for the EIC, you must meet all of the following requirements:
- Must have earned income
- Tax return must cover a full 12 months (unless a short period is filed due to taxpayer’s death)
- Filing status cannot be married filing separately
- Cannot be a qualifying child of another taxpayer
- Must not have filed forms related to foreign earned income
- Must have no more than $3,500 of disqualified income (2018)
In addition, special rules will apply to taxpayers who have qualifying children and to taxpayers who do not have qualifying children.
For more information, consult a tax professional.
Can I take the tax credit for child care?
The child and dependent care credit is a tax credit for up to 35 percent of certain expenses you paid to provide care for your dependent child, your disabled spouse, or a disabled dependent while you worked or looked for work. To be eligible for the credit, you must care for a qualifying person, incur work-related expenses, and have earned income.
A qualifying person is:
- Your dependent who was under the age of 13 when the care was provided and for whom you can claim an exemption, or
- Your dependent who was physically or mentally unable to care for himself or herself and for whom you can claim an exemption (or for whom you could have claimed an exemption but for the income test), or
- Your spouse who is physically or mentally unable to care for himself or herself, or
- In certain cases, a dependent claimed by a divorced spouse
Child and dependent care expenses must be work related to qualify for the credit. That is, the expenses must allow you to work or look for work. If you are married, you must file a joint tax return and both you and your spouse must generally work or look for work. (Your spouse is treated as working during any month he or she is employed, or is a full-time student, or is physically or mentally unable to care for himself or herself.)
Your child and dependent care credit is a percentage of a portion of your work-related expenses. The qualifying expenses on which the tax credit is based are limited to $3,000 for one qualifying dependent, and $6,000 for more than one qualifying individual. The percentage used in calculating the credit is gradually reduced as adjusted gross income (AGI) exceeds $15,000. If your AGI exceeds $43,000, your credit is limited to the minimum allowed by this law–20 percent of qualifying work-related expenses.
For additional details, consult a tax professional.
What is the child tax credit?
The child tax credit is a per-child tax credit against your personal income tax liability. The child tax credit is $2,000 per child.
If you have a qualifying child under the age of 17, you may be entitled to claim this credit. A qualifying child may be a dependent child, stepchild, adopted child, sibling, or stepsibling (or descendant of these individuals), or an eligible foster child. The child must be a U.S. citizen or resident and must live with you for over half the year.
A nonrefundable credit of $500 is also available for qualifying dependents other than qualifying children.
The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level ($400,000 for married persons filing jointly, $200,000 for all others). The credit is reduced by $50 for each $1,000 that your MAGI exceeds the above amounts. To claim the child tax credit, you must file either federal Form 1040 or 1040A.
The credit is refundable, so you may be able to obtain a refund even if the credit exceeds your regular or alternative minimum tax (AMT) liability. Currently, the credit is refundable to the extent of 15 percent of your earned income in excess of $2,500, up to $1,400 per-child. Special rules may apply if you have three or more qualifying children and are eligible for the earned income credit (EIC).
After my child is born, doesn’t the law say I’m entitled to three months of leave?
The law you’re referring to is known as the Family and Medical Leave Act (FMLA). It entitles you to take up to 12 weeks of unpaid leave to care for your new child, but only if you work for a covered employer and meet certain eligibility criteria. Under this law, while you’re on leave, your employer-sponsored health insurance benefits are protected, and your employer must return you to the same job or a similar job when you come back to work.
You may be covered under the FMLA if:
- You work for a private company that has 50 or more employees, or you work for a public school or agency that has less than 50 employees, and
- You have worked at least 12 months (not necessarily consecutively) for that employer, and you have worked at least 1,250 hours during the 12 months immediately preceding your FMLA leave start date
Even if you are covered by the FMLA, your employer can require you to use any vacation days, sick days, or personal days you’ve accumulated in place of unpaid leave time. For instance, if you’ve accumulated two weeks of vacation time, your employer can ask you to use those weeks first, before giving you an additional 10 weeks of unpaid leave. You’re also required to give your employer at least 30 days’ notice of your need for leave, or as much notice as possible, depending on the circumstances.
You should also check the rules of your state, because some states have their own parental leave rules and may pay disability benefits to new mothers. However, if you’re not covered by any law, there’s not much you can do, unless you can negotiate more leave time with your employer.
What is the difference between the child tax credit and the child and dependent care tax credit?
These credits are quite different. First, the child tax credit. The purpose of this credit is simply to provide tax relief for parents, working or not, who have qualifying children under the age of 17. A qualifying child may be a dependent child, stepchild, adopted child, sibling, or stepsibling (or descendant of these individuals), or an eligible foster child. The child must be a U.S. citizen or resident and must live with you for over half the year.
If you’re eligible, you may be able to take a credit on your federal income tax return of up to $2,000 per child. The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level. A nonrefundable credit of $500 may also be available for qualifying dependents other than qualifying children.
The other credit — the child and dependent care tax credit — offers relief to working people who must pay someone to care for their children or other dependents. You may qualify for a tax credit equal to 20 to 35 percent of expenses incurred when someone cares for your dependent child (under age 13), your disabled spouse, or your disabled dependent so that you (and your spouse, if married) may work or look for work. The work-related expenses you can use when figuring the credit are limited to $3,000 for one qualifying individual, and $6,000 for more than one qualifying individual.
For married persons to qualify for the credit, both spouses must work outside the home, or one must work outside the home while the other is a full-time student, is disabled, or is looking for work (provided that the spouse looking for work has earnings during the year). Married couples must also file a joint income tax return. The credit is also available if you’re a single parent or a divorced custodial parent.
For more information, consult a tax professional.