Smart Money: Financial advice for new parents

Smart Money: Financial Advice for New Parents

REVISIT INCOME TAXES

  • Do you need to submit updated Forms W-4 to your employer(s)?
  • Will you need to revise the amount of your quarterly tax payments?
  • The child tax credit, dependent care credit and additional personal exemptions are common factors.
  • Filing status will change for some taxpayers (e.g. possibly from single to head of household).
  • Adoptive parents should explore eligibility for the adoption tax credit.
  • You may be able to use a flexible spending plan for dependent care expenses.

HEALTH INSURANCE

  • Be sure to update your coverage to include new dependents.
  • Consider using a flexible spending arrangement if your employer offers this opportunity.

LIFE INSURANCE

  • Do you have sufficient coverage?
  • You will likely need to update your designated beneficiaries, including for plans provided by your employer.

ESTATE PLANNING

  • You should update your existing will and/or trust (or stop procrastinating if you do not currently have an estate plan).
  • Who will assume guardianship and custody of your children if you pass away?
  • Revisit the beneficiary designations on your retirement plans and update them if necessary.

SAVING FOR HIGHER EDUCATION

  • Section 529 college savings plans are a popular tool.
  1. Investment growth is tax-deferred.
  2. Distributions are not subject to federal income tax if used for qualified expenses.
  3. Funds in a 529 plan may be used at qualified institutions nationwide; they are not tied to a specific school or state.
  4. The State of Michigan offers a limited income tax deduction for Michigan Education Savings Program contributions.
  • The Michigan Education Trust (MET) is a prepaid tuition plan that allows taxpayers to pre-purchase undergraduate tuition for a resident child at any Michigan public university or college, including 28 public community colleges.
  1. Students have 15 years to utilize tuition benefits.
  2. Contributions provide a current Michigan income tax deduction.
  3. Assets may be directed to any eligible public or private university in the nation.
  • A Coverdell Education Savings Account (ESA) is a trust created exclusively for paying a designated beneficiary’s qualified education expenses.
  1. An ESA does not offer a current tax deduction, but does grow in a tax-deferred manner.
  2. Qualified educational expenses include eligible private and public elementary or secondary schools, not just post-secondary institutions.
  3. Contributions are limited to $2,000 per beneficiary per year.
  4. Contribution limitations are phased out for single taxpayers with modified adjusted gross income (MAGI) between $95,000 and $110,000 or married taxpayers with MAGI between $190,000 and $220,000.

Courtesy: Christopher Harper, CPA, MBA

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