Believe it or not, your little bundle of joy can help trim your tax bill. Find out about the tax credits, deductions, and tax-advantaged savings plans that a new member to your family can make available to you.
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Obtain a Social Security Number
When it comes to child-related tax advantages, it all begins with obtaining a Social Security number (SSN) for each child. This will allow you to claim your child as a dependent when you file your taxes. Claiming a dependent without a SSN can result in a $50 penalty and delay a tax refund.
It’s easy to apply for a Social Security card for a newborn. You can request one at the same time that you complete the forms for your child’s birth certificate. If you neglect to do it then, you’ll have to send the Social Security Administration Form SS-5 along with proof of your child's identity, age, and U.S. citizenship.
Take The Child Tax Credit
If you have a child any time in the tax year up to December 31, your baby qualifies you for a tax credit of up $2,000 (tax year 2020). While a tax deduction reduces your taxable of income, a percentage of which is taxed, a tax credit reduces the amount of tax you owe on dollar-for-dollar basis. The Child Tax Credit is phased out at higher income levels. It begins to decrease if your income is above $400,000 on a joint return, or above $200,000 on a single or head of household return (tax year 2020).
If the credit exceeds the amount of your tax liability, you might receive a portion of the Child Tax Credit as a tax refund. The Additional Child Tax Credit can refund up to $1,400 of the credit for tax year 2020. If you didn’t qualify for the refundable portion of the credit in the past, don’t assume you won’t qualify now.
Boost Your Take-Home Pay
An additional dependent can likely reduce the amount of taxes withheld from your paycheck. You can file a new W-4 form to adjust your withholding as soon as your new baby is born. If you’re in the 25 percent tax bracket, adding a dependent will likely reduce your withholding and increase your take-home pay by approximately $75 per month.
Change Your Filing Status
Having a baby could affect not only the number of dependents you have, but also your filing status—if you’re single. If you’re married, adding a child to your family will not change your status. But when you're single, adding a child might enable you to file as a head of household rather than as single. This would increase your standard deduction and likely move you into a more advantageous tax bracket. To be eligible to file as a head of household, you’re required to pay more than 50 percent of the expense of providing a home for the qualifying person—and the new addition to your family likely qualifies.
Claim the Earned Income Tax Credit
When you have a child, the amount of money you can earn and still qualify for the Earned Income Tax Credit (EITC) more than doubles. Without a child, the EITC disappears for joint filers when their income exceeds $21,710 (tax year 2020). For single filers, the limit is $15,820 (tax year 2020). But when you file jointly and have one child, you can earn up to $47,646 and still qualify for the EITC. If you file as single, you can earn up to $41,756 if you have one child.
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Receive the Child and Dependent Care Expenses credit
Do you pay someone to care for your child or children while you work or look for employment? If so, you might be eligible to receive a tax credit valued between $600 and $1,050 for the care of one qualifying child under the age of 13, or a credit between $1,200 and $2,100 for the care of two or more children under 13. The exact amount of the credit is based on your income and the amount you pay for care.
People who have an Adjusted Gross Income (AGI) of $15,000 or less may be able to claim a credit worth up to 35 percent of their qualifying child care expenses. The credit decreases to 20 percent of child care expenses for those taxpayers with an AGI above $43,000 in 2020.
Maximize Child Care Tax Breaks
When it comes to child care expenses, you may be able to reduce your taxes even more than you can with the child care credit. If your employer offers a child care reimbursement account, or Flex Plan, you can place up to $5,000 of your salary per year into a tax-advantaged account. You then use these funds to pay your child care expenses. The money in your Flex Plan is sheltered from state and federal income taxes. It also is sheltered from Medicare and Social Security taxes.
The total tax savings from a Flex Plan can easily exceed the amount you save with the Child and Dependent Care Expenses credit. You must decide between using the child care credit or the reimbursement account. You can’t use both. However, the maximum you can put into a Flex Plan is $5,000, while the child care credit can be applied to up to $6,000 of eligible child care expenses when you have two or more children. That leaves up to $1,000 in expenses that can be claimed for the child care credit, even if you contribute the maximum of $5,000 to your Flex Plan. When you claim the tax credit for these expenses, you can save an extra 20 to 35 percent of the $1,000 more.
Most companies allow employees to sign up for a reimbursement account during a predetermined "open enrollment" period in the fall. However, many companies allow their employees to open Flex Plans as soon as they welcome a new baby into the family.
Take Advantage of the Adoption Credit
You can receive a tax credit of up to $14,300 (tax year 2020) to help offset the cost of adopting a child. Generally, the amount of the credit matches your qualified adoption expenses, but if the child you adopt has "special needs," you might be able receive the maximum credit, even if your actual adoption costs are less. The adoption credit begins to phase out when your Adjusted Gross Income surpasses $214,520, and phases out completely when your AGI reaches $254,520 (tax year 2020).
Save on Educational Expenses
The federal government offers tax-advantaged accounts that allow you to set aside funds to pay your child’s education. You can’t deduct the contributions to these accounts, but the funds can grow tax-free for years, resulting in significant tax savings over time. Withdrawals from these accounts are tax-free as well, as long as the funds are used to cover qualifying educational expenses. One such plan is the Section 529 Education Savings Plan. This plan allows you to set aside money for college expenses, with no restrictions based on your income. (Some states allow residents to deduct contributions to state 529 plans as well.)
The Coverdell Education Savings Account (ESA) allows you to set aside up to $2,000 per year in a tax-advantaged account for each child you have. Again, earnings from the account are tax-free when the funds are used to pay qualifying educational expenses. ESA funds can be used to pay for college, but they can also be used to cover elementary, middle school, and high school costs. This can include tuition, but it also applies to such items as a computer or education software that is used for school. ESA contributions phase out when your AGI rises from $190,000 to $220,000 if you’re married and filing a joint return, or from $95,000 to $110,000 if you’re single (tax year 2020).
TurboTax can guide you through filing your tax return, including handling all child-related deductions and credits. We’ll ask simple questions about your tax situation and identify all of the tax deductions and credits you qualify for that can lower your tax bill or possibly put a refund in your pocket.