The “shadow inventory,” which is the pending supply of homes not included in the official numbers, increased to 1.7 million units as of September, according to a report from First American Core Logic.
That’s up from 1.1 million a year ago, thanks to rising numbers of real estate owned (REO) by banks and mortgage lenders, foreclosures, deeds in lieu of foreclosure, and mortgages at least 90 days delinquent.
The visible supply of housing inventory, or homes that are actually listed for sale on the market, decreased to 3.8 million units from 4.7 million a year earlier.
As a result, the total unsold inventory (shadow + visible inventory) decreased to 5.5 million units from 5.7 million units in September 2009.
The total months’ supply, which is the amount of time it would take to clear all the inventory, fell to 11.1 months from 12.7 a year earlier.
“This indicates that while the visible months’ supply has decreased and is beginning to approach more normal levels, adding in the pending supply reveals there is still quite a bit of inventory that will impact the housing market for the next few years, especially in the context of the current increase in home sales, which is in part due to artificially low interest rates and the homebuyer tax credit,” the report said.
In other words, recent home sales data is a bit skewed, so the inventory will probably take even longer to clear than predicted, once the homebuyer tax credit expires and mortgage rates climb higher.
Check out the nifty charts below to see just how much of an impact the shadow inventory (in yellow) can have on the real estate market.
Government mortgage financier Fannie Mae is offering 3.5 percent in seller assistance if you purchase one of their previously foreclosed HomePath properties.
The offer is good for any owner-occupant who purchases an REO (Real estate owned) home listed on Homepath.com by May 1, 2010.
The 3.5 percent of the final sales price may be used toward either closing costs and/or choice of appliances; finally, you can get that shiny metallic Sub-Zero fridge you always wanted.
“Attracting qualified buyers to the market and reducing the inventory of vacant homes is critical to stabilizing neighborhoods and helping the market recover” said Terry Edwards, Executive Vice President of Credit Portfolio Management, in a press release.
“Many families are taking advantage of the federal homebuyer tax credit to buy a new home so this is a great time for Fannie Mae to offer some additional help.”
Many of the Fannie Mae-owned properties also offer special financing, allowing borrowers to purchase a home with as little as three percent down.
The down payment can be funded by your own savings, or via a gift, grant, or loan from a nonprofit organization, state or local government, or employer, so let’s hope this whole thing doesn’t get exploited (mortgages with no money down).
I did a quick search and found 757 eligible properties in Los Angeles County, with listing prices ranging from $41,000 in Lancaster, CA to $634,900 in Glendale, CA.
America is strongest when her people are strong. Therefore, when considering policy to improve our nation, we should always incentivize striving with an emphasis on equality of opportunity, understanding that a rising tide lifts all boats.
In my role as president of the Jack Kemp Foundation, I moderated an “Innovations in Affordable Housing” webinar. The webinar featured a panel of nationally known affordable housing experts, hosted by affordable housing developer National CORE, with the Sarasota Housing Authority, the National Multi Housing Council (NMHC) and the Housing Partnership Network (HPN) as panelists.
These policy leaders highlighted innovative solutions being pursued across the country to combat homelessness, house low-income families, and use affordable housing as a tool to improve the lives of those who need a hand up, not a handout.
What did we learn?
First, skyrocketing rents are placing a severe strain on families, seniors, and disabled persons of limited financial means as they seek affordable places to live. The most obvious impact is an increase in homelessness – which creates a host of additional community challenges. But this crisis also saps families’ resources for basic necessities and limits economic mobility.
We learned that the costs to build affordable housing rental units are also soaring. This makes it more difficult than ever to meet housing demand for lower-income families, since the rents they can afford do not cover the capital and operating costs of building new housing.
But one thing we have learned over the last 50 years is that we cannot just throw money at the problem. The cost of having federal taxpayers fund the full cost of needed affordable housing units – or subsidizing rents – is prohibitive and unrealistic. So, we need to be wise. We need to leverage our limited federal funding sources to access private sources of capital, using market-based approaches that maximize efficiency of the federal dollars being spent.
We need to prioritize local solutions.
Top-down federal grant programs, in silos separated by federal agencies and hampered by cumbersome rules, are not the answer. The housing tax credit program is a good model. Funds are competitively allocated by states to individual developments, ongoing accountability is maximized by the need to maintain tax eligibility for investor tax deductions and local developers compete for scarce dollars based on need and the merit of their proposals.
We also need to focus on people, not just buildings. Our affordable housing programs cannot just be about warehousing people living in poverty. They need to be about promoting the health, well-being and economic mobility of low-income families living in affordable housing. Our policies should focus on root causes of homelessness, such as mental health and addiction, as well as accessing health care and other community services.
Unfortunately, our housing policies are often grounded in the distant past.
HUD funds over $200 million a year for service coordinators to help families and seniors access services in their local communities. But these programs are arbitrarily limited to public and Section 8 housing units. This means that almost 100% of the new affordable housing built in the last 50 years – and the residents they serve – are ineligible for these grants. And there are no federal programs that directly fund resident services in federally funded affordable housing.
Congress should expand eligibility for resident services for low-income families – a good investment of federal funds. Accessing local health care services can help seniors avoid the alternative of nursing homes, which cost taxpayers considerably more as they pick up the tab through Medicaid.
Family self-sufficiency resident services are also a good investment. Such programs help low-income residents gain educational and occupational skills – which can help them take the step to affording market-price homes. Each time this happens, it’s the equivalent of building a new affordable housing unit for another low-income family.
The April 13 panel also explored other priorities that Congress should pursue. There is an almost universal consensus among housing advocates that the volume of low-income housing tax credits must be boosted. One panelist argued for adoption of the Neighborhood Homes Act, which would establish a federal tax credit for new construction or substantial rehabilitation of affordable, owner-occupied housing in distressed urban, suburban, and rural neighborhoods.
Another panelist suggested creating tax incentives for the long-term preservation of affordable housing units owned by qualified nonprofits, a far more cost-effective approach than building new units.
There is no shortage of ideas for meeting the modern-day challenges of affordable housing. I hope the ideas circulating in our webinar can spur further national discussion and debate in Congress about the most effective ways to modernize policy prescriptions and meet that challenge in a way that helps all Americans flourish.
Jimmy Kemp is the President of the Jack Kemp Foundation.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Jimmy Kemp at [email protected]
To contact the editor responsible for this story: Sarah Wheeler at [email protected]
Choosing to adopt a child is an exciting milestone in life, but it’s also one that takes a lot of planning and effort. Future adoptive parents can opt for either a domestic adoption or international adoption, but there are a lot of differentiating factors that may influence the decision.
If you’re considering adoption, you’ll want to understand the distinctions between domestic and international adoptions, from the process and timeline to the costs involved, so you can decide what’s best for you.
The Domestic Adoption Process
One of the major advantages of choosing a domestic adoption is that you have the potential to adopt a newborn. However, the timeline is not set in stone and may depend on whether you opt for an open, semi-open, or closed adoption. Most domestic adoptions are considered at least “semi-open.”
Depending on the agency you work with, you may need to be chosen by a birth mother based on your profile. Once you’re selected, the timing depends on the expected (and actual) due date. The process usually takes a few months. Typically, you get access to the child’s medical records as well as the birth mother’s family history.
An open adoption also allows some contact and conversations with the birth mother before the baby is born. In a semi-open adoption, personally revealing information is withheld between the adoptive parents and the birth mother.
Once the baby is born and you officially adopt the child, the adoption agency may facilitate sending updates to the birth mother, as well as pictures so she can see the baby is well taken care of.
Domestic Adoption Eligibility Requirements
American adoption requirements vary by state and by the adoption agency you choose to work with. Generally, you must be at least 18 years old, and there’s often a minimum age difference required between you and the child.
Most states allow domestic adoptions regardless of marital status; parents can be married, single, divorced, or widowed and still qualify.
Explore your state and city adoption websites for more details on additional requirements unique to your area.
The International Adoption Process
International adoption, thanks to rules and clearances, typically will not involve a newborn, so you’ll need to be open to welcoming an older baby or toddler to your home.
With international adoption, there are issues that could affect your ability to adopt, even in the middle of the process. New international laws and relations between the United States and other countries have the potential to derail families who are in the middle of an adoption. The process varies by country but typically takes between 1.5 and 2.5 years.
While you can find out about the child’s medical history, you likely won’t know anything about the family history. Once you adopt a child from abroad, you won’t have any contact with the birth family.
International Adoption Eligibility Requirements
Each country has its own eligibility requirements for adoptive parents, which are typically much stricter than domestic requirements. Often you’ll need to meet income requirements, which may include a higher amount if you already have children. Some countries also have net worth requirements.
In addition, you may discover that some countries restrict the type of families that are allowed to adopt from there. For example, some only offer adoption to married couples or single women.
These rules vary by country, and there are some countries, such as Colombia, that allow single men and same-sex partners to adopt.
International vs Domestic Adoption Costs
The costs vary greatly with both international and domestic adoptions, but the common thread is that it can be expensive if you’re not adopting a foster child.
For international adoptions, expect to pay anywhere from $20,000 to $50,000, depending on the country.
In South Korea, for example, adoptions may cost between $32,000 – $38,000. In China, the range is $35,000 to $40,000. Adoptions from India may span $21,000 to $25,000.
Choosing an international adoption also requires you to travel to the country (often more than once) in advance of actually adopting your child.
Domestic adoptions through a private agency may cost between $30,000 and $60,000.
It is much less expensive, and potentially even free, to adopt through foster care. However, as a foster parent, your goal is to help reunite the child with the existing family. Adoption may become an option, but it is not the primary objective.
Recommended: Common Financial Mistakes First-Time Parents Make
Funding Options for Adoptions
Adoption costs are often out of reach for many U.S. families. But even if you can’t tap into your savings (or don’t want to), you can explore other options for funding your adoption.
Recommended: 5 Tips for Saving for a Baby
Employer Benefits
Some companies offer adoption assistance funds as part of their employee benefits packages. In addition, about 34% of employers offer paid adoption leave and 25% provide paid foster child leave. This provides flexibility to transition when a new family member arrives.
You may want to check with your HR department to make sure you don’t miss out any adoption benefits offered by your company.
Adoption Federal Tax Credit
The federal government provides some tax benefits for adoptions. First, if you use employer benefit funds to pay for the adoption, that money is excluded from your income so you don’t have to pay federal taxes on it.
The tax code also offers an adoption tax credit that can help offset some of the costs involved in adoption, whether you adopt for a domestic or international adoption. Qualified adoption expenses include things like adoption fees, legal costs, and travel expenses.
The tax credit amount changes every year, so it’s a good idea to talk to an accountant for more specifics.
There are income limits for qualifying for both the tax exclusion and credit.
Friends and Family
Many adoptive parents ask friends and family members for financial support when starting the adoption process. You could even start a crowdfunding campaign as a way for your broader community to donate to your adoption fund.
Hopeful parents may want to include a compelling personal story about the path to adoption to help draw in potential donors from their community.
Just remember that if you use a crowdfunding platform, you generally have to pay fees taken out of the money you’ve raised. This usually ranges from 3% to 8% when including both fundraising fees and processing fees.
Recommended: New Parent’s Guide to Setting Up a Will
Personal Loan
Another option for financing your domestic or international adoption is with an unsecured personal loan.
This type of loan typically comes with a fixed interest rate and repayment period, which allows you to make a set monthly payment over a set number of years.
You’ll need good credit to qualify for the best interest rates. Lenders may also take your debt-to-income ratio into consideration. You may qualify for a larger loan amount if your existing debt is low compared to your monthly income.
Sometimes referred to as an adoption loan, the proceeds from this type of loan can be used for just about anything. That means not just the agency and legal fees but also soft costs like travel and meals, which can get expensive if you’re adopting from abroad.
The Takeaway
Choosing to adopt a child can be life-changing, but an international or domestic adoption usually carries a high price tag. Fortunately, with tax benefits and funding options available, you can worry less about how to pay for all of the costs associated with the process and focus more on the joy of growing your family.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Opening a 529 plan is a tax-advantaged way to set aside money for college. The money you contribute can grow tax-deferred and qualified withdrawals are tax-free. While there is no federal tax break for making 529 plan contributions, you may be able to claim one at the state level. Breaking down the 529 tax deduction by state can give you an idea of how you might be able to benefit when saving for college. Need help creating a college savings plan? Get connected with a financial advisor near you to learn more.
Understanding 529 Plan Tax Deductions
Tax deductions are amounts that reduce your taxable income for the year. You can claim both federal and state tax deductions. They’re different from tax credits, which reduce your tax liability on a dollar-for-dollar basis.
Claiming tax deductions can help you to pay less in taxes or garner a bigger refund if you typically get money back at the state or federal level. Some deductions are above-the-line, while others require you to itemize on your tax return. Credits, meanwhile, lower your tax bill.
The federal government offers some tax deductions for education, but a deduction for 529 plan contributions isn’t one of them. You can, however, deduct interest paid to student loans. The American Opportunity Tax Credit and the Lifetime Learning Tax Credit can also be claimed to offset higher education expenses.
529 Tax Deduction by State
Every state offers at least one 529 plan, but states are not required to offer a tax deduction or other tax breaks for education. That being said, a number of states do offer deductions if you’re making contributions to a 529 plan. States can also offer credits or other tax breaks as an incentive to save for college.
Nine states do not have income tax which means they don’t offer a 529 plan deduction. Those states are Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. California, Hawaii and Kentucky do not offer any type of 529 tax deduction but do assess income tax.
This table breaks down the 529 tax deduction by state.
529 Tax Deductions by State
Alabama
$5,000 single filers; $10,000 joint filers
Alaska
None
Arizona
$2,000 single or head of household; $4,000 joint filers
Arkansas
$5,000 single filers; $10,000 joint filers
California
None
Colorado
Full contribution
Connecticut
$5,000 single filers; $10,000 joint filers
Delaware
$1,000 single filers; $2,000 joint filers
Florida
None
Georgia
$4,000 single filers; $8,000 joint filers
Hawaii
None
Idaho
$6,000 single filers; $12,000 joint filers
Illinois
$10,000 single filers; $20,000 joint filers
Indiana
20% tax credit on contributions (maximum credit $1,500)
Iowa
$3,785 per beneficiary
Kansas
$3,000 single filers; $6,000 joint filers
Kentucky
None
Louisiana
$2,400 single filers; $4,800 joint filers
Maine
Up to $1,000 per beneficiary
Maryland
$2,500 single filers; $5,000 joint filers
Massachusetts
$1,000 single filers; $2,000 joint filers
Michigan
$5,000 single filers; $10,000 joint filers
Minnesota
$1,500 single filers; $3,000 joint filers
Mississippi
$10,000 single filers; $20,000 joint filers
Missouri
$8,000 single filers; $16,000 joint filers
Montana
$3,000 single filers; $6,000 joint filers
Nebraska
$10,000 single filers; $5,000 married filing separately
Nevada
None
New Hampshire
None
New Jersey
$10,000 per taxpayer
New Mexico
Full contribution
New York
$5,000 single filers; $10,000 joint filers
North Carolina
None
North Dakota
$5,000 single filers; $10,000 joint filers
Ohio
Up to $4,000 per beneficiary
Oklahoma
$10,000 single filers; $20,000 joint filers
Oregon
$150 tax credit single filers; $300 tax credit joint filers
Pennsylvania
$17,000 single filers; $34,000 joint filers
Rhode Island
$500 single filers; $1,000 joint filers
South Carolina
Full contribution
South Dakota
None
Tennessee
None
Texas
None
Utah
4.95% tax credit per beneficiary
Vermont
10% credit on up to $2,500 for single filers; $5,000 joint filers (maximum $250 per taxpayer, per beneficiary; VHEIP is the only eligible plan)
Virginia
Up to $4,000 per account
Washington, D.C.
$4,000 single filers; $8,000 joint filers
Washington
None
West Virginia
Full contribution
Wisconsin
$3,860 per beneficiary; $1,930 for divorced parents or those married filing separately
Wyoming
None
Claiming 529 Plan Tax Benefits
To claim a tax deduction or credit for 529 plan contributions, you must live and file taxes in a state that offers these benefits. You must also be eligible to get a tax break, based on your relationship with the account beneficiary.
In most states, any contributor to a 529 plan can claim a tax break, regardless of whether they’re the account owner or not. However, some states limit tax benefits to account owners only. That means grandparents, aunts and uncles or other contributors would be excluded from deducting contributions or claiming tax credits.
The good news is that there are no time limits on claiming education tax benefits associated with a 529 college savings plan if you’re eligible to do so. Unlike Coverdell Education Savings Accounts (ESAs), which require you to withdraw all assets once the beneficiary turns 30, 529 plan money can stay in the account indefinitely. So, as long as you’re making contributions you could still claim a deduction or tax credit if you’re eligible.
Is Contributing to a 529 College Savings Plan Worth It?
Saving money in a 529 plan can be worth it for a few reasons, starting with the laundry list of tax breaks they offer. Contributions grow on a tax-deferred basis, so you’re not having to pay tax on any earnings while the money is in the account. Any qualified withdrawals are tax-free, as long as you use them for eligible higher education expenses. You can also withdraw up to $10,000 without a tax penalty to pay for qualified expenses for grades K-12.
You can open a 529 plan and contribute money to it on behalf of any eligible beneficiary, including yourself or your spouse. Should your beneficiary decide not to go to college or if they don’t use up all of their savings, you could transfer the money to a different beneficiary. And as outlined in the table above, some states offer tax breaks for college savings in the form of deductions or credits.
Aside from those benefits, a 529 plan can offer a better rate of return on your money compared to keeping money in a high-yield savings account or even a CD. They also allow for more flexibility than savings bonds. And while you could tap into an Individual Retirement Account (IRA) to pay for college, that could shortchange your retirement savings and potentially trigger some tax consequences.
The Bottom Line
Getting a head start on college planning can help you to be better prepared when it’s time for your student to head off to school. Saving money in a 529 plan can benefit you at tax time and your money may have more room to grow than it would sitting in a bank account. Reviewing your 529 tax deduction by state can help you figure out how much of an additional tax advantage you might get from saving.
Financial Planning Tips
If you’re ready to start saving for college but you don’t know how to approach it, getting professional advice can help. A financial advisor can walk you through different college savings options so you can choose the one that best fits your needs and situation. Finding a financial advisor doesn’t need to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
When comparing 529 savings plans, remember that you’re not locked into choosing your state’s plan. You could invest in a different state’s plan if you prefer the range of investment options offered or if another plan allows for higher lifetime contribution limits. Keep in mind, however, that your choice of plan may affect your ability to deduct those contributions on your state income tax return.
Rebecca Lake, CEPF®
Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
Children can be incredibly expensive. It’s vital to plan for those new expenses in your household budget.
Once your children are born, there are important long-term safety nets you should implement (e.g. insurance, estate planning, etc)
Thankfully, there are numerous tax breaks available to parents to ease the financial burden of raising kids. Make sure you’re capturing those benefits.
My wife and I are at that stage of life where most of our close friends and family have multiple young children. And in the many conversations we have with those parents, I’ve realized a trend:
Most parents share similar financial questions and concerns.
So let’s provide the best financial tips for new parents.
Big Financial Changes for New Parents
Some financial best practices stay the same before or after children.
But there are many big changes. Let’s start with those.
Insurance Coverage
When you have kids, review your insurance policies to ensure you have adequate coverage. The two that stand out most to me are healthinsurance and life insurance.
Health insurance is important for your family’s well-being. Why?
It provides financial protection against the high costs of medical care, ensures access to necessary healthcare services, helps cover medical expenses and safeguards against unexpected illnesses or accidents that can otherwise result in significant financial burden.
If you can’t cover it with your bank account, you probably need insurance for it.
Life insurance matters because it protects your loved ones financially in case of your untimely death. Specifically, focus on term life insurance. Not whole insurance. Not indexed universal insurance. Term life insurance only! Because life insurance is not a substitute for proper investing (despite what TikTok grifters will tell you).
If you own a home or have a car, appropriate property and auto insurance coverage is also necessary.
Child-Raising and Childcare Costs
Children are expensive!
The Brookings Institute estimated that “the average middle-income family with two children will spend $310,605 to raise a child born in 2015 up to age 17.“
[Part of their estimate included 4% inflation per year. If we crunch the numbers, that’s the equivalent of $16,400 in 2023 dollars every year for 17 straight years]
We can break that down a bit more.
If you need outside childcare, the early years of parenting are likely to be the most financially strenuous. According to Ilumine, the average cost of childcare in the US is just shy of $15,000 per year, or $1,250 per month. And according to Zippia, about 58% of parents rely on childcare so they can continue to work.
Granted, childcare expenses tend to decrease or disappear once your children enter school. But for those first five years, yikes!! $15,000 per year is a huge expense!
Most households cannot lightly absorb such a change in spending. The average American family earns $100,000 per household, taking home $6,000 per month after taxes. $1200 per month on daycare is 20% of that take-home pay!
Education
Start planning for your child’s future education early on.
We wrote a complete breakdown of 529 plans a few years ago. 529 accounts are the gold standard for education savings due to their flexibility and tax advantages. Regular contributions to such accounts can help alleviate the financial burden of higher education expenses later on.
While Coverdell accounts are also education-focused tax-efficient accounts, they are generally suboptimal compared to 529 plans, and should only be used if you are fully maximizing a 529’s potential (e.g. hitting the maximum annual gift tax exclusion of $17,000)
Estate Planning
Consider creating or updating your estate plan once you have kids. Estate planning helps avoid potential conflicts and ensures that the parents’ wishes are followed.
For example, you’ll want to designate legal guardians for your minor children, ensuring they are cared for by trusted individuals if something were to happen to you.
You should also create or update your will to dictate how your assets (financial accounts, property, and personal belongings) should be distributed in case of your untimely death.
Additionally, you might look into setting up trusts to protect and manage assets for the benefit of the children until they reach a certain age or milestone.
Long-Term Financial Goals
You had goals before kids. You still have those goals. But your timelines might have shifted a few years.
It’s essential to set and keep long-term financial goals. This could include saving for retirement, buying a home, or achieving other milestones.
Start contributing to retirement accounts early, take advantage of employer-matched retirement plans, and consider consulting a financial advisor for guidance on long-term investment and planning strategies.
Children & Taxes
Whether you file your own taxes or work with an accountant, make sure you understand and are benefitting from the tax code. Parents typically pay much less in taxes than those without dependent children.
Child Tax Credit: The Child Tax Credit is a tax benefit that reduces the amount of tax owed for eligible parents. As of 2023, the credit is up to $2,000 per qualifying child under the age of 17. The credit is partially refundable, meaning that even if the credit exceeds your tax liability, you may be eligible for a refund.
Earned Income Tax Credit (EITC): The EITC is a refundable tax credit that benefits lower-income working parents (earned income under $59,187). The credit amount increases with the number of qualifying children, and eligibility is based on income and filing status.
Child and Dependent Care Credit: Are you paying for childcare? Parents who pay for childcare expenses in order to work or seek employment may qualify for the Child and Dependent Care Credit. This credit can help offset a portion of eligible childcare expenses, with a maximum credit of up to $3,000 for one child or $6,000 for two or more children.
Education-Related Tax Benefits: As children grow older, there are tax benefits available for education expenses, such as the American Opportunity Credit and the Lifetime Learning Credit. These credits can help offset the costs of higher education and certain qualifying educational expenses.
Long story short – if you’re a parent, you should be paying less tax. Make sure you’re taking advantage. Lord knows you’re paying for it in other places.
Financial Topics That Don’t Change (Much) After Kids
Certain financial priorities and habits shouldn’t change too much after having kids…
Budgeting
My budgeting rule is simple:
You can plan your expenses ahead of time.
You can track them after the fact.
You can do both.
But you can’t do neither.
Personally, I use the YNAB tool. I sit down ~twice per month to review, update, track, and plan ahead.
You can use this link to get 2 months of YNAB for free.
Budgeting is crucial, especially after adding massively expensive children to your family. It helps you track your income and expenses, ensuring you can meet your family’s needs and save for the future. Identify your essential expenses, such as housing, utilities, food, childcare, etc. Here are some ideas for how many budget categories you should have.
Kelly and I are currently moving to a bigger house and talking about having kids. You better believe planning our budget is a huge part of the conversation.
Emergency Fund
While the size of your emergency fund might change after kids, the need for an emergency fund is ever-present.
I’ve written here before…life throws you bitter curveballs. You need to be financially prepared to handle them.
How big should your emergency fund be? Typically in the range of 3-12 months worth of living expenses. The range is all a function of “how re-hireable are you if you lost your job?” If your expertise is in high demand, a 3-month emergency fund might be sufficient. But if you’d rather take your time with an exhaustive job search, you might need a 12-month emergency fund to make ends meet.
This emergency fund money should sit in a bank account, ideally something like a high-yield savings account. You should not invest your emergency fund – here’s why.
Debt Management
Debt can be a silent financial killer. No, Dave Ramsey, it’s not all bad. But you should certainly avoid it if you can…especially if you have little rugrats running around to distract you from paying it off.
Prioritize paying off high-interest debts such as credit card debt or personal loans. Don’t take on unnecessary debt. Establish a plan to become debt-free over time.
The best medicine is prevention. The second-best is decisive action.
Unique Financial Topics Related to Kids
And then there are some unique financial topics that some parents might face.
Special Needs Planning
Parents of children with special needs should consider financial planning specific to their circumstances.
This might include certain government benefits, setting up special needs trusts, and ensuring long-term care and support for their child’s unique needs.
Thankfully, there are fiduciary financial planners who specialize and focus on this very topic.
Digital Management and Identity Protection
In today’s digital age, parents should consider their children’s digital assets, including online accounts, social media profiles, and digital files. As part of estate planning, designating someone to manage or have access to these assets in case of incapacity or death is important to protect and preserve them.
That said, children can be targets of identity theft. Parents should take steps to safeguard their children’s personal information and be vigilant about potential fraud or misuse of their identities.
Other Investing Accounts
We already covered 529 plans. But there are other potential investment opportunities for children that you might want to consider.
Custodial Accounts (UGMA/UTMA): These accounts allow parents to invest directly on behalf of their children, typically with small tax advantages (they are taxed at the child’s tax rate).
Once the children reach their “age of majority” (which is 18 in most states), the children gain full custody of the accounts. For this reason, custodial accounts should be used with caution. It’s pretty easy for $40,000 of UGMA savings to turn into a new Jeep Wrangler.
Roth IRAs for Kids: If a child has earned income, they may be eligible to contribute to a Roth IRA.
Roth IRAs are awesome. Contributions are made with after-tax money but grow tax-free, and qualified withdrawals in retirement are tax-free. Roths are a powerful tool for long-term savings and investing for a child’s future.
But let’s go back: to qualify for a Roth IRA, your children need earned income, and need to be filing taxes on that income. Odd jobs like mowing lawns and babysitting do qualify (as long as the income is reported). And for teens, official W2 summer jobs also qualify.
But kids don’t want to invest! How boring! That’s why generous, forward-thinking parents should consider the following “loop hole”:
Jonny earns $4000 as a lifeguard over the summer.
Let Jonny keep his $4000 for his own spending needs (fun, college savings, whatever…)
The generous parents contribute $4000 to Jonny’s Roth IRA. As long as Jonny reported his income, there’s nothing wrong with this solution.
By the time Jonny is done with college at 22, he might already have $20,000+ of contributions in his Roth IRA. It’s not inconceivable that that amount alone could grow to $300,000+ of tax-free money by the time Jonny retires (7% growth for 40 years).
What a gift!
Time To Graduate
Kids are great.
They’re also expensive.
Hopefully, these financial planning ideas for new parents will help you navigate your parental future!
Thank you for reading! If you enjoyed this article, join 6500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
If you prefer to listen, check out The Best Interest Podcast.
Children can be incredibly expensive. It’s vital to plan for those new expenses in your household budget.
Once your children are born, there are important long-term safety nets you should implement (e.g. insurance, estate planning, etc)
Thankfully, there are numerous tax breaks available to parents to ease the financial burden of raising kids. Make sure you’re capturing those benefits.
My wife and I are at that stage of life where most of our close friends and family have multiple young children. And in the many conversations we have with those parents, I’ve realized a trend:
Most parents share similar financial questions and concerns.
So let’s provide the best financial tips for new parents.
Big Financial Changes for New Parents
Some financial best practices stay the same before or after children.
But there are many big changes. Let’s start with those.
Insurance Coverage
When you have kids, review your insurance policies to ensure you have adequate coverage. The two that stand out most to me are healthinsurance and life insurance.
Health insurance is important for your family’s well-being. Why?
It provides financial protection against the high costs of medical care, ensures access to necessary healthcare services, helps cover medical expenses and safeguards against unexpected illnesses or accidents that can otherwise result in significant financial burden.
If you can’t cover it with your bank account, you probably need insurance for it.
Life insurance matters because it protects your loved ones financially in case of your untimely death. Specifically, focus on term life insurance. Not whole insurance. Not indexed universal insurance. Term life insurance only! Because life insurance is not a substitute for proper investing (despite what TikTok grifters will tell you).
If you own a home or have a car, appropriate property and auto insurance coverage is also necessary.
Child-Raising and Childcare Costs
Children are expensive!
The Brookings Institute estimated that “the average middle-income family with two children will spend $310,605 to raise a child born in 2015 up to age 17.“
[Part of their estimate included 4% inflation per year. If we crunch the numbers, that’s the equivalent of $16,400 in 2023 dollars every year for 17 straight years]
We can break that down a bit more.
If you need outside childcare, the early years of parenting are likely to be the most financially strenuous. According to Ilumine, the average cost of childcare in the US is just shy of $15,000 per year, or $1,250 per month. And according to Zippia, about 58% of parents rely on childcare so they can continue to work.
Granted, childcare expenses tend to decrease or disappear once your children enter school. But for those first five years, yikes!! $15,000 per year is a huge expense!
Most households cannot lightly absorb such a change in spending. The average American family earns $100,000 per household, taking home $6,000 per month after taxes. $1200 per month on daycare is 20% of that take-home pay!
Education
Start planning for your child’s future education early on.
We wrote a complete breakdown of 529 plans a few years ago. 529 accounts are the gold standard for education savings due to their flexibility and tax advantages. Regular contributions to such accounts can help alleviate the financial burden of higher education expenses later on.
While Coverdell accounts are also education-focused tax-efficient accounts, they are generally suboptimal compared to 529 plans, and should only be used if you are fully maximizing a 529’s potential (e.g. hitting the maximum annual gift tax exclusion of $17,000)
Estate Planning
Consider creating or updating your estate plan once you have kids. Estate planning helps avoid potential conflicts and ensures that the parents’ wishes are followed.
For example, you’ll want to designate legal guardians for your minor children, ensuring they are cared for by trusted individuals if something were to happen to you.
You should also create or update your will to dictate how your assets (financial accounts, property, and personal belongings) should be distributed in case of your untimely death.
Additionally, you might look into setting up trusts to protect and manage assets for the benefit of the children until they reach a certain age or milestone.
Long-Term Financial Goals
You had goals before kids. You still have those goals. But your timelines might have shifted a few years.
It’s essential to set and keep long-term financial goals. This could include saving for retirement, buying a home, or achieving other milestones.
Start contributing to retirement accounts early, take advantage of employer-matched retirement plans, and consider consulting a financial advisor for guidance on long-term investment and planning strategies.
Children & Taxes
Whether you file your own taxes or work with an accountant, make sure you understand and are benefitting from the tax code. Parents typically pay much less in taxes than those without dependent children.
Child Tax Credit: The Child Tax Credit is a tax benefit that reduces the amount of tax owed for eligible parents. As of 2023, the credit is up to $2,000 per qualifying child under the age of 17. The credit is partially refundable, meaning that even if the credit exceeds your tax liability, you may be eligible for a refund.
Earned Income Tax Credit (EITC): The EITC is a refundable tax credit that benefits lower-income working parents (earned income under $59,187). The credit amount increases with the number of qualifying children, and eligibility is based on income and filing status.
Child and Dependent Care Credit: Are you paying for childcare? Parents who pay for childcare expenses in order to work or seek employment may qualify for the Child and Dependent Care Credit. This credit can help offset a portion of eligible childcare expenses, with a maximum credit of up to $3,000 for one child or $6,000 for two or more children.
Education-Related Tax Benefits: As children grow older, there are tax benefits available for education expenses, such as the American Opportunity Credit and the Lifetime Learning Credit. These credits can help offset the costs of higher education and certain qualifying educational expenses.
Long story short – if you’re a parent, you should be paying less tax. Make sure you’re taking advantage. Lord knows you’re paying for it in other places.
Financial Topics That Don’t Change (Much) After Kids
Certain financial priorities and habits shouldn’t change too much after having kids…
Budgeting
My budgeting rule is simple:
You can plan your expenses ahead of time.
You can track them after the fact.
You can do both.
But you can’t do neither.
Personally, I use the YNAB tool. I sit down ~twice per month to review, update, track, and plan ahead.
You can use this link to get 2 months of YNAB for free.
Budgeting is crucial, especially after adding massively expensive children to your family. It helps you track your income and expenses, ensuring you can meet your family’s needs and save for the future. Identify your essential expenses, such as housing, utilities, food, childcare, etc. Here are some ideas for how many budget categories you should have.
Kelly and I are currently moving to a bigger house and talking about having kids. You better believe planning our budget is a huge part of the conversation.
Emergency Fund
While the size of your emergency fund might change after kids, the need for an emergency fund is ever-present.
I’ve written here before…life throws you bitter curveballs. You need to be financially prepared to handle them.
How big should your emergency fund be? Typically in the range of 3-12 months worth of living expenses. The range is all a function of “how re-hireable are you if you lost your job?” If your expertise is in high demand, a 3-month emergency fund might be sufficient. But if you’d rather take your time with an exhaustive job search, you might need a 12-month emergency fund to make ends meet.
This emergency fund money should sit in a bank account, ideally something like a high-yield savings account. You should not invest your emergency fund – here’s why.
Debt Management
Debt can be a silent financial killer. No, Dave Ramsey, it’s not all bad. But you should certainly avoid it if you can…especially if you have little rugrats running around to distract you from paying it off.
Prioritize paying off high-interest debts such as credit card debt or personal loans. Don’t take on unnecessary debt. Establish a plan to become debt-free over time.
The best medicine is prevention. The second-best is decisive action.
Unique Financial Topics Related to Kids
And then there are some unique financial topics that some parents might face.
Special Needs Planning
Parents of children with special needs should consider financial planning specific to their circumstances.
This might include certain government benefits, setting up special needs trusts, and ensuring long-term care and support for their child’s unique needs.
Thankfully, there are fiduciary financial planners who specialize and focus on this very topic.
Digital Management and Identity Protection
In today’s digital age, parents should consider their children’s digital assets, including online accounts, social media profiles, and digital files. As part of estate planning, designating someone to manage or have access to these assets in case of incapacity or death is important to protect and preserve them.
That said, children can be targets of identity theft. Parents should take steps to safeguard their children’s personal information and be vigilant about potential fraud or misuse of their identities.
Other Investing Accounts
We already covered 529 plans. But there are other potential investment opportunities for children that you might want to consider.
Custodial Accounts (UGMA/UTMA): These accounts allow parents to invest directly on behalf of their children, typically with small tax advantages (they are taxed at the child’s tax rate).
Once the children reach their “age of majority” (which is 18 in most states), the children gain full custody of the accounts. For this reason, custodial accounts should be used with caution. It’s pretty easy for $40,000 of UGMA savings to turn into a new Jeep Wrangler.
Roth IRAs for Kids: If a child has earned income, they may be eligible to contribute to a Roth IRA.
Roth IRAs are awesome. Contributions are made with after-tax money but grow tax-free, and qualified withdrawals in retirement are tax-free. Roths are a powerful tool for long-term savings and investing for a child’s future.
But let’s go back: to qualify for a Roth IRA, your children need earned income, and need to be filing taxes on that income. Odd jobs like mowing lawns and babysitting do qualify (as long as the income is reported). And for teens, official W2 summer jobs also qualify.
But kids don’t want to invest! How boring! That’s why generous, forward-thinking parents should consider the following “loop hole”:
Jonny earns $4000 as a lifeguard over the summer.
Let Jonny keep his $4000 for his own spending needs (fun, college savings, whatever…)
The generous parents contribute $4000 to Jonny’s Roth IRA. As long as Jonny reported his income, there’s nothing wrong with this solution.
By the time Jonny is done with college at 22, he might already have $20,000+ of contributions in his Roth IRA. It’s not inconceivable that that amount alone could grow to $300,000+ of tax-free money by the time Jonny retires (7% growth for 40 years).
What a gift!
Time To Graduate
Kids are great.
They’re also expensive.
Hopefully, these financial planning ideas for new parents will help you navigate your parental future!
Thank you for reading! If you enjoyed this article, join 6500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
If you prefer to listen, check out The Best Interest Podcast.
There’s been a lot of buzz about a new homebuyer tax credit ever since HUD Secretary Shaun Donovan did all but rule it out on CNN’s “State of the Union” television program a week or so ago.
While he noted that it was “too early to say after one month of numbers whether the tax credit will be revived or not,” that was enough for the media and the general public to begin speculating.
Adding fuel to the fire was WL Ross & Co. CEO Wilbur Ross, who argued today that the homebuyer tax credit should be re-instituted to lift up the sagging housing market.
The billionaire investor, who began picking up loan servicing companies on the cheap after the mortgage crisis got underway, said such a credit would revive buying interest and reduce growing inventory.
While speaking at the KBW Insurance Conference in New York City today, he proposed a 5% of the purchase price homebuyer tax credit to get prospective buyers interested again.
Sales Increased, but Homebuyer Tax Credit Had $22 Billion Price Tag
Home sales saw a boost after the first homebuyer tax credit was announced, but home purchase applications quickly dropped off after its expiration back at the end of April.
The latest homebuyer tax credit offered up to $8,000 for first-time homebuyers and $6,500 for so-called move-up buyers.
While the tax credit was deemed somewhat successful, the hefty cost has made it a less attractive option to turn to in the future.
In fact, the homebuyer tax credits came with a price tag of about $22 billion – and many have argued that they simply pushed would-be buyers into the fold a little earlier.
$25,000 Homebuyer Tax Credit
That said, the chief economist of the National Association of Home Builders told the NY Times a $25,000 homebuyer tax credit would really get “people off the bench,” but the chances of such a measure making its way through Congress was nonexistent.
Southern California home sales plummeted 20.6 percent in July from one month earlier, and were off 21.4 percent from one year earlier, DataQuick reported this week.
Just 18,946 new and resale homes sold in six Southland counties during the month, the slowest July since 2007, and the second-slowest since 1995.
Last month’s numbers were 27.4 percent below the July average of 26,085 sales, which goes back to 1988.
“It appears some of the sales that normally would have occurred in July were instead tugged into June or even May as buyers tried to take advantage of the expiring tax credits,” said DataQuick president John Walsh, in a statement.
“Some of last month’s underlying technical numbers were largely flat, indicating that the market is treading water.”
He noted that some sideways buying and selling is expected to kick in, especially among homeowners who have owned for more than seven years that didn’t pull equity via serial refinancing – these borrowers can take advantage of the record low mortgage rates.
Median Price Falls
Meanwhile, the median price paid for a Southland home fell to $295,000 last month, down 1.7 percent from the $300,000 seen in June, but up 10.1 percent from a year ago.
During the current housing cycle, the median hit a low of $247,000 in April 2009, and a high of $505,000 in mid-2007, just as the mortgage crisis got underway.
Foreclosure sales accounted for 34.2 percent of resales, up from 32.8 percent in June, but down from 43.4 percent a year ago.
FHA loans were used to finance 36 percent of all home purchases last month, down from 38.8 percent last month and 39.2 percent last year.
Jumbo loans accounted for 18.4 percent of last month’s sales, up from 17.6 percent last month and 15.2 percent a year ago.
The USDA’s zero down loan program is slated to make a comeback, thanks to legislation making its way to President Obama’s desk.
The measure was part of H.R. 4899, otherwise known as “The Emergency Supplemental Appropriations Act,” which the Senate passed last week.
It increases the Rural Housing Service (RHS) commitment authority allowing guaranteed loans and making the program completely self-sufficient; previously, the RHS provided conditional commitments.
However, it increases the guarantee fee for borrowers to 3.5 percent, though that too can be rolled into the loan.
“This is going to be a great lift for thousands of rural home buyers who need to close on their home purchases before Sept. 30 to take advantage of the home buyer tax credit,” said NAR President Vicki Cox Golder, in a statement.
“Many rural families would have been left out in the cold without these guaranteed loans. Increasing the commitment authority will help rural families, support local housing markets, create jobs and generate new tax revenues,” she added.
New guidelines are expected to be released after the President signs the bill.
Currently, the USDA home loan program is reserved for families in rural areas with incomes of up to 115 percent of the median income, who are without adequate housing, but able to afford mortgage payments.