Priceless to you—and worth $3,950 to the IRS. And who would believe a $1,000 tax credit that smells like baby powder!? Having a baby is an absolute blessing, with a few tax benefits to boot! But there are some financial changes to consider as well in light of your precious new family addition.
If you just received the happy news, it's time to review your health insurance policy's maternity and newborn care coverage. If it seems lacking, you may want to shop around for a new policy as soon as possible. Remember, under the Affordable Care Act, insurance companies cannot refuse coverage or hike premiums due to "pre-existing conditions" such as pregnancy.
After the miraculous day, you may find a big surprise waiting for you, and we don't mean the giant stork sign in the front yard announcing your new arrival. Once you enroll your child into your health plan—usually required to be completed within 30 days—you may see higher out-of-pocket expenses. Review your policy's deductibles and copays to see how they might be affected by this newest family member.
In your single days, and perhaps through early marriage, you may have given little thought to life insurance. But now the need is legitimate and looming. That new little person is counting on you.
To start, consider a 20- or 30-year level-premium term life insurance policy. At this stage in your life, the cost should be rather affordable. And it will need to be. You'll likely want income-replacement coverage on both parents, and you also should consider other factors: the coverage of education expenses through college, as well as housing and the lifestyle you wish to provide for the child in the event of your untimely passing.
It's no surprise that a growing family brings a lot of new expenses—child care, clothing, diapers, medicine, toys—and there's a good chance your two-income family may be reduced to a single-income, at least for a while. That means you'll need a fully fed and functioning emergency savings account available to fill any gaps in cash flow.
It would also be a good idea to check with your employer to see if they offer a flexible spending account. An FSA can allow you to set aside up to $2,500 each year—untaxed—for health care costs. You can use this money to cover copayments and deductibles, prescriptions, breast pumps, supplies and many medical expenses. But you have to use up the majority of the balance held in your FSA each year; carryovers to the next year generally cannot exceed $500.
Preparing for the future
In the weeks and months following the birth of your new child, your sleeplessness will be aggravated by countless details: obtaining the baby's Social Security number, establishing guardians and drawing up a will—all a blur of responsibility among endless feedings and changes.
There are two more important tasks to add to the list. One is another form of insurance. Yes, it's probably your least favorite thing to buy, especially compared to that adorable giraffe teething toy, but essential nonetheless. Disability insurance will provide a portion of your income in the event you are unable to work for some period of time. All the more important now that there's a new mouth to feed!
And then there's the college fund. Take a look at your state's 529 education savings plan. These accounts offer tax-free growth of investments that can be used for qualified educational expenses. Most will allow you to sign up as the owner of the account with a small deposit, naming your child as beneficiary. Then you can tell the grandparents, aunts and uncles all about the new college fund you've established for their little angel, and watch the contributions roll in.
Your new "deduction" is priceless. Taking care of these financial necessities as soon as possible will allow you to give your new child the most valuable asset of all: your time.
Hal Bundrick is a writer for NerdWallet.com, a personal finance site dedicated to helping consumers stay informed about subjects like the tax benefits of 529 plans.
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February 27, 2014
With tax season in full swing, let’s take a look at some of the most common pitfalls that people make while preparing their own tax returns and how you can avoid falling in to them.
Most websites will start their list of tax preparation errors by pointing out that you can deduct some medical expenses, but you should stop before you get that far. Before you start poring over receipts and charitable contributions, make sure you’re not leaving money on the table with the “standard deduction.” The standard deduction is the IRS’s baseline for what an average person spends on deductible expenses. This amount is $6,100 for a single person, $8,950 for a head of household, and $12,200 for a married couple that’s filing jointly.
The IRS has a form to help you determine if you should itemize or take the standard deduction. There are six categories on it: medical expenses, taxes, interest, gifts to charity, casualty and theft losses, and work expenses. Before you start itemizing, take a moment and make a ballpark estimation. None of these expenses can include costs that someone paid for you, like insurance in the case of medical expenses or employer reimbursement in the case of work expenses. Take a look at your expenses in these categories for December and multiply that by twelve. Are the items you’re trying to deduct likely to be greater than your standard deduction amount? If not, you can save yourself a ton of time and hassle, and probably even a little money, by taking the standard deduction.
2. Not proofreading
The easiest place for the IRS to detect fraud is by comparing names and Social Security numbers. Make sure every person you list on your return is listed by the same name that’s on their Social Security information, and that each of those names is spelled identically. While these errors aren’t difficult to correct, they can significantly delay the processing of your return. If you recently changed your name, make sure the name change has been processed with the Social Security Administration.
While small math errors will be automatically corrected by the IRS, another place to check your errors is in rounding. If you’re rounding to the nearest dollar, that’s fine. But if you’re regularly putting in items that end in 5 or 0, that’s a signal to the IRS that you’re working from memory, not from receipts. Make sure you check the amounts that you’re listing against the paperwork you have on hand. Resist the impulse to estimate or “fudge” your income even a little bit; all of the income statements you get are copied to the IRS, and rounding, addition, or data entry errors are sure to trigger red flags from investigators.
3. Being too aggressive (in predictable ways)
If you’ve been looking for tax advice online, you’ve probably heard the sage advice that you should be as aggressive as you can be in preparing your return. If you’ve got a deduction that you think you might qualify for, you should claim it. The IRS will only investigate if it thinks it likely that the amount of money it could recover from that investigation will justify the cost. That’s true, but the IRS is an increasingly adaptable organization. They’ve caught on to the most common places where people exaggerate their deductions and can quickly identify these as ways that may trigger an investigation.
The three most common places people exaggerate their deductions are in a home office, work-related expenses, and charitable contributions. A home office must be a defined space in your home which is used exclusively and regularly for work functions. An office where you meet clients and work on your business is deductible. A den where you read your newspaper and also occasionally do a few hours of work is not. Your car is a deductible business expense when it’s used only for your business, not if it’s a family car that you also occasionally use to run business errands. If you’re going to itemize your charitable contributions, make sure you have records of the value of items you donate. Charitable contributions in excess of 5% of your income are easy places for the IRS to call for proof.
4. Making financial decisions for their tax implications
With a few exceptions, most tax incentives aren’t enough in and of themselves, to make any particular financial decision worthwhile. It’s very unlikely, for example, that you can make a charitable contribution that’s large enough to save you money on your taxes. Making your financial decisions based on the tax implications is a lot like letting the tail wag the dog.
While the IRS says that anyone with knowledge of high school mathematics (and an afternoon to kill) can do their own taxes, the hurdles to filling out a tax form are many. Luckily it only comes due once a year so it’s best to grin, bear it, and file it right the first time.
January 31, 2014
While most people were safely home for the holidays, the Department of Education released a terrifying new report: The estimated cost of college education in America is $62.6 billion. That seems like a staggering number until it's compared to how much the federal government spends on making college education affordable. The total of the grants, tax benefits, work-study opportunities, and loan subsidies provided by the federal government is $69 billion.
The news of this finding is making waves in Congress, where some lawmakers looking at that $69 billion as a safe place to make easy cuts. This could mean a serious threat to your plans to save for your own or your child's college education.
With our Spring College Planning webinar coming up, on February 18 (click here to sign up) we'll take a look at some of the most common concerns about college savings.
Q: That's a lot of money. Is a college education worth it?
A: That's a complicated question, and it really depends upon what college gets you. For people who are perusing professional degrees to become doctors, lawyers, engineers, architects, or researchers in the hard sciences, a 4-year degree is definitely worth the investment. These careers are relatively recession-proof and have very high earnings potential. For people who are interested in technical degrees, some colleges are worthwhile, too. Getting a 2-year degree in medical technology, vehicle maintenance, or any other practical trade is relatively low cost and provides an excellent possibility of work after graduation. For these people, who are interested in studying business, English, philosophy, or communication another valid option is to earn their degree more slowly while working and building a resume that gains practical job experience for the student.
Q: How much should I save for college?
A: The short answer is that you can never save too much. College education is expensive and is continually getting more expensive. If you were planning on using federally subsidized loans, scholarships, or work-study programs, know that these programs are always on the chopping block, even more so after the recent Department of Education report.
The cost of just one year at a public university rises by about 6% annually, so by the year 2030 it will cost your child $44,000 a year to attend school. Multiply that by 4 years, and you can safely assume that tuition will run in the neighborhood of $176,000. Add in room and board, books, and transportation, and $200,000 is a realistic expectation.
Q: What can I do to secure a brighter educational future for me and my children?
A: Even if you or your children don't end up going to college, putting money away into a tax-deferred savings program can still be a wise idea. A 529 savings plan, available from your credit union, is a tax-deferred college savings plan. You invest up to $300,000 (or have automatic deductions from your pay check). You pay no income tax on the interest, and if it's used for school, you never do. If you or your child receives significant scholarship money, you can withdraw the excess funding, frequently with no penalty. If you or your child decides not to go to college, you only pay a 10% penalty on the earnings, and must pay taxes on the interest that has accrued in the account as well.
That $200,000 you had budgeted for college would put a young entrepreneur in a better position with start-up funding, enable you or your child to buy a house, or allow the benefactor of the fund to start saving or investing for retirement. Saving now for college can pay great dividends, even if you never set foot in one.
The MHV Investment & Retirement Center* can walk you through the steps of setting up a 529 savings plan or Coverdell Educational Savings Account (ESA). It's a fairly straightforward process that involves little risk and can offer significant tax benefits over a savings account or a privately managed investment fund. Set up an appointment to meet with a representative today.
Also, be sure to sign up for our College Planning webinar on February 18!
*Securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC , a registered broker/dealer and investment advisor. CBSI is under contract with the financial institution to make securities available to members.Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution.
CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America.
January 2, 2014
Except for Veterans Administration loans, it still generally takes some cash up front to get into a home. How much cash you'll be required to have up front depends on the type of mortgage (whether FHA or conventional) and your personal financial situation. The better your credit, though, the lower the down payment the lender will typically expect.
How much will you need to save? If you are applying for an FHA loan and your FICO score is between 500 and 579, plan on a 10 percent down payment or more. If your score is 580 or better, you may be able to qualify for a 3.5 percent down mortgage.
Conventional mortgages tend to have somewhat higher down-payment requirements. You begin to become competitive for a 5 percent down mortgage when you have a FICO score of around 660, though lenders vary widely in practice. However, to save on private mortgage insurance costs (PMI), you may want to go with a VA loan, if you qualify or save up 20 percent.
So what's the best way to go about saving that money? Here are the factors to keep in mind:
Safety. Unless you are planning to wait years to buy your home, you don't want to take a lot of risk with this money. Hopefully, you will have your down payment saved up within a year or two. It doesn't make sense to risk a large market loss and throw your dream of home ownership off schedule.
Liquidity. You don't want to lock this money up for years. You want to be able to access your money quickly and cheaply.
Returns. You want to get a reasonable return, or yield, on your money. But don't sacrifice safety for yield if it means risking your goal of home ownership.
A Guarantee. Investments carry risk. But some financial vehicles come with an in-writing guarantee. Examples include balances in checking and savings accounts and share savings certificates at credit unions, which come with a guarantee of up to $250,000 in the event the credit union becomes insolvent. Banks have a typical arrangement via the Federal Deposit Insurance Corporation.
So where should you put your money? Here are some common options that have stood the test of time – along with the advantages and disadvantages of each.
Cash. You can stuff cash in a mattress or coffee can. This is convenient, but not very secure. Your money is subject to the hazards of theft, flood, fire or loss. It also generates no return whatsoever.
Checking or Savings Accounts. These generally produce a small return, but at least it's something. They are, however, very convenient, if you are disciplined about not spending the money that's earmarked for your down payment. If your savings is very small, it may make sense to keep it here instead of paying fees to maintain a low balance account. These are guaranteed against bank failures up to $250,000 per account holder, either from FDIC (for banks) or the National Credit Union Share Insurance Fund, or NCUSIF. Because credit unions are mutually-owned by depositors just like you, you can frequently get a better deal in the long run by using a credit union.
Certificates of Deposit (AKA "Share Savings Certificates" at Credit Unions). These typically pay a higher yield than checking or savings accounts, and also qualify for federal insurance coverage. However, they do require you to commit your money for a specific period of time. The penalty for early withdrawals is usually the equivalent of six months of interest.
Money Markets. This is a type of mutual fund that's made up of low-risk, short-term bonds and commercial paper designed to maintain a stable per-share price of $1 per day. By and large, they have been able to do so, historically, though there are no guarantees. They may offer higher yields than guaranteed accounts, and do not require a time commitment. However, there is a possibility that your money market will lose money. Some financial institutions do offer insured money markets.
Permanent Life Insurance. If you own a permanent life insurance policy, such as a whole life policy, it accumulates cash value over time. Whole life and well-funded universal-life insurance policies can be effective tools for savers – especially since whole life insurance cash value receives a guaranteed crediting rating and is guaranteed never to decline in value as long as you pay premiums as scheduled.
Individual Retirement Arrangements. You can withdraw up to $10,000 from your IRA to put a down payment on a home with no penalty. For traditional IRAs, you will need to pay income taxes on any such withdrawals.
Thrift Savings Program. If you are a federal employee or member of the United States military, the Thrift Savings Program, or TSP, allows you to borrow money to make your down payment on a home on advantageous terms. For more information, visit www.tsp.gov.
401(k) Loans. Some employers allow you to borrow from your 401(k). Typically, you will need to repay the loan within five years or face taxes and penalties on any remaining balance. However, if you leave your employer, you will have to repay the loan immediately or face taxes and penalties on what you've withdrawn. This makes using 401(k) loans tricky for longer terms – especially where employment prospects are not certain.
Whatever vehicles you choose to utilize in accumulating your savings, your credit union is ready to assist. Come in and speak with one of our Lending or MHV Investment & Retirement representatives for a no-obligation consultation, or simply some advice on how to get started.