Having your first child is an exciting time. Your lifestyle will fundamentally change, which means your financial life will have to adapt. Now that you’ll be responsible for a new life, you’ll need to take a closer look at several financial areas, including your taxes, financial strategy, insurance coverage and estate plan.
The IRS gives parents tools that can help save on their tax bill. The first thing you notice is an additional personal exemption for each dependent. The personal exemption amount for 2017 is $4,050, but phases out as your adjusted gross income reaches $313,800 for married couples filing jointly. Married couples with modified adjusted income less than $110,000 can also take advantage of the Child Tax Credit. Furthermore, if you pay for someone to care for your child while you work, you may be eligible for the Child and Dependent Care Credit.
Of course, when adjusting your taxes, you will also want to look at your household budget, what type of lifestyle you want, and where career falls in importance. A family needs to weigh the costs associated with both parents working against the earned income the working parent can bring in to the household. Consider the costs of child care, the need for additional household help for cooking, cleaning or lawn maintenance, and commuting costs. If one spouse is working merely to pay for child care, it may be a better economic decision to be a stay-at-home parent. If one spouse decides to stay home with the child, you should consider increasing your emergency reserve. Generally three to six months of living expenses is recommended; however, a single-income family situation generally lends itself to having a larger emergency reserve.
A growing family also needs to evaluate their insurance needs. While it is important to ensure life insurance needs are addressed for both spouses—most likely through term coverage—it is equally important to have disability coverage. Becoming disabled can be a more costly drain on a family’s finances than a premature death. Car accidents, health problems and unfortunate occurrences can leave one unable to work and earn an income. Do not assume that long-term disability coverage through an employer will be enough. If the premiums are paid by an employer and were not included in gross income, any proceeds from the policy are taxable as income, leaving less money during a time when it may be needed most.
You will also need to prepare for your health insurance premium to increase when you add a dependent. The plan you choose needs to fit your family’s medical history and current health care concerns first. The “Summary Plan Description,” a federally required document for all group health care plans, explains what medical conditions the plan covers; what conditions are excluded; what your deductibles, co-payments, co-insurance and out-of-pocket maximum are; discusses your maximum lifetime benefit amount, and many more important plan facts you need to understand.
Even if you do not have a sizeable estate, you still need a Will to legally name a guardian, successor guardian, custodian and successor custodian for your children. If you and your spouse were to die, you do not want your state of residence deciding how your child will spend the next 18 years of his or her life. The second part to estate planning is to update your beneficiary forms. Beneficiary forms for life insurance, annuities, IRAs, 401(k)s and pensions, in addition to accounts with titles, such as Joint with the Right of Survivorship, Payable on Death, Transfer on Death, and assets already titled in a trust bypass probate and trump a Will.
You’ll notice that “saving for college” is not on this to do list. While funding a child’s college education is a goal of many parents, you need to understand there are external sources available for college funds. There are no such programs to fund your own retirement. In our opinion, you should not put your child’s education ahead of your own needs.
With these priorities in mind, you can focus on maximizing your family’s wealth, and in turn, introduce an element of financial stability into your child’s life. If you have questions regarding how children will affect your overarching financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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