Travis H. Long, CPA, Inc. Blog

Originally published in the Pacific Grove Hometown Bulletin

Decembery 7, 2011

Well, not me, technically, but my wife is.  After 12 years of wedded bliss, we are entering the baby business.  Like most future parents we are excited, but being a CPA takes it to a whole new level of joy!  There are so many planning opportunities around children.

Planning can start well before birth or even years before conception.  For example, the highly tax savvy high school senior could think, “Someday, I am going to have a family of my own.  Knowing the high cost of college I am about to incur, I should really start saving for my future child’s education now to maximize tax-deferred growth!  That raucous week in Cancun is really a waste of money, anyway.”  Instead this high schooler opens a section 529 plan and names his older sister’s child as a beneficiary.  After four years in a frat house, a year traveling after school, a few years bouncing around finding himself, falling in love, getting married, and finally having a child, this new parent then renames the beneficiary to his own child with a ten-year jump start on tax deferred education saving!

What about the expense of having the child?  This natural process which has gone on quite successfully for a few million years or so at no cost, mostly outdoors in the dirt, can now be quite pricey, and sterile.  It may cost $5,000 if you use a midwife or $25,000 in a hospital!  You will likely go over your deductible and insurance will pick up the rest.  A great option is to have a high deductible health plan going forward with a health savings account.  This setup makes virtually all of your family medical expenses deductible whereas people with traditional plans are stuck itemizing with a 7.5 percent of AGI floor – meaning most people do not get any tax benefit.  It also allows the deductibility of more types of expenses and alternative care.

Next, there is the additional exemption deduction to get excited about – we are talking $3,700!  You are also eligible for child tax credits – up to a $1,000 per child.  And if you are low income, the child may help qualify you for a larger earned income credit: up to $3,094 with one child or $5,751 with three or more!  Child tax credits and earned income credits can be refundable – meaning, even if you do not pay a dime in tax, the federal government will “refund” the money to you anyway – but having children is not a great way to get rich.   For advanced tax planning, you aim to have your child near the end of December and still receive the exemption and credits for the whole year.  No expense, but full benefit – brilliant!

Do not forget about dependent care credits and education credits either.  Dependent care credits will save you up to $1,050 for one child or $2,100 for two or more children.   Education credits for college age children such as the Hope credit can save you up to $2,500 in tax.

My favorite planning opportunity which I have yet to implement with a client is baby modeling.  If you can get your baby into print or TV commercials, then I feel you would have a strong case to say the baby has earned income.  Maybe the “talent’s” agent, a.k.a. mom or dad, would need to be paid out a heavy agent fee since it really required a lot of work on their part – but then again, I am sure that many famous actors and actresses have to be babied by their agents too!  Once your baby has earned income, you can establish a Roth-IRA for retirement!  Think about 18-22 years of additional investment compounding!  (Call me if you have a child in this situation – I want to put this in action!!)

So when is our baby due – LATE April…we hope!

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.