Financial Steps to Take After a Child Is Born

Case Study

12 Oct Financial Steps to Take After a Child Is Born

The arrival of a newborn can be a joyous occasion. Even while emotions are at their peak, though, you should not neglect the practical aspects. Several steps should be taken to protect the family’s finances and the sooner the better.

Start with Social Security

Assuming the birth takes place in a hospital, ask for a birth registration form; most hospitals distribute them to maternity patients. Check the box on the form to request a Social Security number for your baby. You will have to supply the parents’ Social Security numbers.

If the birth does not take place in a hospital, or if there is some other reason this form is not available, contact your local Social Security office to get the process started. The same is true if you are adopting a child.

Once you have the Social Security number, you will be on solid ground for claiming tax benefits. Those include an additional dependency exemption and perhaps the child tax credit. You also will be able to open savings and investment accounts in the child’s name.

Notify your employer

Another key step is locking in health insurance for the newborn. If you are covered by an employer plan, let your employer know about the baby. When both parents have employer plans, determine which one will be better going forward. If neither parent has a health plan at work, notify your health insurance company directly. There may be a 30-day window, after the birth, in which to enroll the child and avoid possible problems.

Regardless of your health insurance situation, you should speak with someone at your company about adjusting your IRS Form W-4, which determines the amount that is withheld from your paychecks for income tax. On your W-4, the more ‘allowances’ you claim, the less tax you will have withheld.

Therefore, you might add one allowance to your W-4 after the birth of a child. You will have more cash flow with every paycheck, money that you will need to meet the increasing expenses of new parenthood or expanding a family.

That said, adding one allowance might not be sufficient.

 Example 1: Marge and Paul Carter have been living in an apartment with their young daughter. The Carters recently had a son, so they bought a house to have more room for their family. The house was purchased with a mortgage, and the deductible interest payments will sharply reduce the tax the Carters will owe each year. However, those deductions, which are only realized in their tax refund, will not help them with the year-long cash crunch they will be experiencing with a newborn baby and a new mortgage payment. Adding only one allowance to Paul’s W-4 may still result in over-withholding and make for a financially-strained year.

Paul could add two, three, or more allowances to his W-4, boosting the net amount from each paycheck. The danger, though, is that Paul will be under-withheld and will wind up owing taxes and possibly interest or penalties at tax time. Our office can help you determine the amount of W-4 allowances to claim, to maximize cash flow without incurring a future tax problem. Similarly, we can help you determine how much to adjust estimated tax payments after the birth of a child.

Enhance your estate plan

Whether you just had your first child or have added a sibling to the family, the addition of a family member should mean reviewing your estate plan. Do both parents have wills? If not, getting them drawn up should be a top priority. Parents who already have wills should see if any changes are required.

Trusted Advice: Child Tax Credit

  • The Child Tax Credit can save up to $1,000 per year for each qualifying child.
  • To merit the credit for 2016, a child must be 16 or younger at the end of this year.
  • You must claim the child as a dependent on your federal tax return.
  • To get the full $1,000 tax savings, your modified adjusted gross income (MAGI) must be less than $110,000 on a joint return, or $55,000 for married taxpayers filing a separate return.
  • For all other taxpayers, this MAGI number is $75,000. The credit phases out for taxpayers with MAGIs higher than the amount for their filing status. Partial credits are allowed with somewhat higher MAGI.
  • Typically, MAGI for this credit will be the same as AGI.
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