Having a Baby? Keep Your Eye on These Tax Deductions
Let’s face it. Having a baby is expensive, especially if it’s your first. As you prepare to welcome a newborn into the world, you will be faced with many different struggles and you will run into area where you have no previous knowledge. Before you panic, take a deep breath; all parents have been in the same boat before and made it out fine.
One thing to keep in mind is that you will receive new tax deductions now that you have a baby. These deductions were not available to you before, so that is something to celebrate! As this is likely your first time learning about the tax deductions and credits, let’s go over some of the ones available.
Previously, you received a deduction for yourself and if married, your spouse. Now that you have a child, you will be able to claim an additional dependent and receive additional deductions. This exemption is a direct reduction of your taxable income.
For example, if the deduction is $3,500 per person, your new deduction would be $10,500. Pretty modest, right? You are able to continue taking this deduction until your child reaches the age of 19.
This deduction is primarily used for single parents who have a child. If you are single and you have a new bundle of joy, you can start claiming Head of Household, which will provide you a bigger standard deduction on your taxes. This new standard deduction will help you when it comes to the tax bracket you are in as it directly reduces your taxable income as well.
Not everyone can stay at home with their new baby and if you are one of those people, you may receive a tax credit for going back to school or work and placing your baby in child care. You may receive a credit that allows you to claim between 20-35% of your dependent care expenses, up to $3,000 spent for one child or up to $6,000 for two or more children in child care. This credit can help you quite a bit, especially when you have multiple children in child care.
This is a refundable tax credit intended to assist low-to-middle income families and individuals. To qualify for this credit, you must meet certain financial, family size, and filing status guidelines. If you do, you can claim up to 3 dependents under this tax credit. This credit can be a significant help for many families as a refundable credit can provide funds in your pocket even if you have no tax liability that is normally offset by credits.
The child tax credit is another great one that is available to many people. This credit is not a deduction, which means it reduces the calculated tax dollar for dollar, allowing you to receive up to $1,000 for each qualifying child.
Typically, to qualify for this credit, the total household income needs to be less than $110,000 for married couples. The credit amount declines depending on your filing status. If the amount of your credit exceeds your tax liability, you may be eligible to receive the balance as a refundable credit, adding more money to your pocket.
If you are adopting a child, you may receive a tax break as well. You can apply your qualified expenses of up to $13,400 per child to your tax liability, depending on your circumstances. To qualify for the credit, you must have a qualifying child who was legally adopted. This adoption credit will directly reduce the tax liability on your income.
If you have already started setting aside money for your child, you may qualify for a college savings deduction. Under Section 529, all deposits of money made into the qualifying college account will be free from taxes when withdrawn for qualified education expenses. This is a huge lifesaver for many couples and of course for their children too when it comes time to take the money out. There are limits on how much money you can deposit and qualify for a tax-free break, so check with your local bank or tax agent first.
Having a baby means that you can save additional money on your taxes to help offset the cost of having one. Before you claim any of the deductions or credits, make sure you qualify first to avoid penalties from the IRS.
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