The arrival of a newborn can be a joyous occasion. Even while emotions are at their peak, though, you shouldn’t 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’ll have to supply the parents’ Social Security numbers.
If the birth doesn’t take place in a hospital, or if there’s some other reason this form isn’t available, contact your local Social Security oﬃce to get the process started. The same is true if you’re adopting a child.
Once you have the Social Security number, you’ll be on solid ground for claiming tax beneﬁts. Those include an additional dependency exemption and perhaps the child tax credit. You’ll also 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’re 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’s withheld from your paychecks for income tax. On your W-4, the more “allowances” you claim, the less tax you’ll have withheld.
Therefore, you might add one allowance to your W-4 after the birth of a child. You’ll have more cash ﬂow with every paycheck, money that you’ll 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, won’t help them with the year-long cash crunch they’ll 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, in order 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.