Having a baby is a life-changing experience, and while there's nothing like welcoming a child into the world, a new baby can quickly wreak havoc on your finances. Here are a few key points to consider if you're expecting a baby in 2017.
Your medical costs might go up
If you thought prenatal care was expensive, wait till you see how much it costs to pay for your child's medical needs. Parents with insurance spend an average of $1,297 in out-of-pocket medical costs during a child's first year of life, but if you have a child with medical issues or a health plan with lackluster coverage, you could see that figure climb. Not only that, but you'll need to add your child to your health insurance plan, which means your premium is likely to rise.
To help offset these costs, you can open a healthcare flexible spending account (FSA) through your employer and use pre-tax dollars to pay for eligible medical expenses such as in-office copays, prescription drugs, and dental services. The annual limit for 2017 is $2,600, and if you max out that limit, you could save $650 in taxes if your effective tax rate is 25%.
The only thing to watch out for is that FSAs work on a use-it-or-lose-it basis. If you put $2,600 into an FSA but only rack up $2,000 in eligible medical expenses over the course of your plan year, you'll forgo the remaining $600. Estimating your medical costs can be tricky if you've never had a baby before, so if need be, err on the side of putting less money into your FSA. You can always adjust that figure upward the following year once you get a better sense of your expenses.
You might spend a small fortune on child care
If you're planning to go back to work after having a baby, then you may be in for a shock. More than 50% of Americans spend over 10% of their income on child care, and in recent years, the costs have only gone up. Currently, the average American family spends $196 per week, or $10,192 a year, on full-time day care center care. Meanwhile, the average cost of hiring a nanny is $556 per week, which means that having a full-time nanny throughout the year would cost almost $29,000. Yikes.
The good news, however, is that you can take steps to reduce the child care burden -- namely, by opening a dependent care FSA. Similar to a healthcare FSA, a dependent care FSA allows you to allocate up to $5,000 a year as a couple filing jointly for eligible child care costs, which include day care, preschool, and summer camp. If you max out that limit and your effective tax rate is 25%, then you'll save $1,250 right off the bat. Like healthcare FSAs, dependent care FSAs have a use-it-or-lose-it policy, but if you're looking at full-time child care for an infant, it's unlikely that you won't rack up $5,000 in expenses over the course of a year.
You may be eligible for some rewarding tax breaks
Depending on your income, having a baby could help you take advantage of some lucrative tax credits. First, there's the Earned Income Tax Credit (EITC), which is designed to help lower-income families. Eligibility is based on the amount you earn and the number of qualifying children who live with you. If your income is on the lower side, it pays to see whether you're allowed to claim the EITC.
Then there's the Child Tax Credit, which lets you reduce your taxes by up to $1,000 per qualifying child under the age of 17 in your household. Though this credit is one of the simplest ones to calculate, it does start to phase out when you earn $75,000 as a single tax filer and $110,000 as a couple filing jointly.
Finally, there's the Child and Dependent Care Credit, which, depending on your child care expenses and income level, allows you to claim up to $3,000 for a single child under 13 or $6,000 for two or more children under 13. Only low-income families, however, will get the maximum benefit from this credit.
Remember, unlike a tax deduction, a tax credit is a dollar-for-dollar reduction of your tax liability, so it pays to see what you're eligible for. Furthermore, some credits, like the EITC, are refundable, which means that if they lower your tax liability to less than $0, you'll actually get a check from the IRS for the difference.
Having a baby can be a rewarding experience on so many levels. The more prepared you are financially, the more you'll be able to enjoy this new and exciting chapter in your life -- sleepless nights and all.