• Babies present new financial challenges.baby image by Yvonne Bogdanski from Fotolia.com
  
  While new parents are flooded with pitches for everything from life insurance for the baby to educational software, financial advice is harder to come by. Common sense can guide new parents through many of the new expenses, but it can be difficult to sort through the tax considerations of the new arrival.
  
  

Medical Expenses

• For many young parents, the birth of a baby may be the first time they have faced deducting medical expenses. Non-reimbursed pre-natal and delivery costs are deductible, as are non-reimbursed "well-baby" doctor visits, if the total costs exceed 7.5 percent of adjusted gross income (10 percent if subject to the alternative minimum tax). Travel costs to and from the doctor are also deductible.
  
  Keeping a spreadsheet to itemize these expenses can be useful because it allows the new parent to sort through co-pays, insurance contributions and out-of-pocket costs. This is especially useful for organizing information at tax time.
  
  

Child Tax Credit

• The Child Tax Credit can be used to offset the new parent's tax burden. According to the IRS, "you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17." A taxpayer is eligible for this if the child lived with the parents for at least six months of the year. This credit is less available to wealthy taxpayers. For married couples filing a joint return, it begins to phase out at $100,000.
  
  

Exemption

• In addition to the Child Tax Credit, the new parent can claim a new exemption. For example, in the 2009 tax year, a taxpayer can deduct $3,650 for each dependent. Unlike the Child Tax Credit, this is available regardless of when the child was born during the year. For example, if a baby was born on Dec. 31, 2009, the parents could claim the new exception, but not the Child Tax Credit.
  
  

Uniform Gift to Minors

• Parents can also shield income from taxation while saving for college by opening a Uniform Gifts for Minors Account (UGMA) at their savings institution. Money that is deposited in this account is taxed at the child's rate, instead of the parents' rate. A set of rules called the "kiddie tax rules" governs how much unearned income a child can make before the investment is taxed at a higher rate. The one caution is money that is placed in such an account belongs to the child, not the parent. A parent cannot withdraw money from such an account if the need arises.
  
  

529 Plans

• New parents can also take advantage of 529 plans. These work much like a 401K or IRA (in fact, these used to be called "education IRAs". Contributions into a 529 plan grow tax free, and remain tax free when withdrawn for college expenses. In most instances, earnings from a 529 plan are not even taxed by the state, which is a significant benefit for parents. Most banks and brokerage firms offer 529 plans. Just remember that unsecured investments are not protected by the FDIC.