Taxes and Parenting
While it introduces added expenses, there are financial advantages to having a child. As new parents, you have gained a dependency exemption you can deduct on your tax return. In addition to requesting a birth certificate, apply for a Social Security number for your child soon after the birth. That will make the baby official in the eyes of the IRS and is the first step to getting your deduction.
Who Is a Dependent?
There are five requirements that a person must meet to be your dependent.
- This person must be a relative or at least have lived in your home as a family member all year.
- If the person is married, he or she can't file a joint return.
- This person must be a United States citizen, resident alien or a resident of Canada or Mexico.
- This person must have a gross income of less than $3,000, unless the person is under the age of 19 or a full-time student under age 24.
- You must have provided more than 50 percent of the person’s total support for the tax year for which you are taking the deduction.
Tax credits differ from deductions in that they don't just lower your taxable income; they actually directly lower the tax you owe. So a $1 tax credit will lower the tax you owe by $1.
If you pay for someone to take care of your child, a nanny for example, you may receive a tax credit equal to 20 to 30 percent (depending on your income) of qualified child care expense. This credit can be up to $2,400 for one child or $4,800 for two or more children.
Keep all payment records, including receipts, for all child care expenses. You will need them as proof of your expenses. Nursery school, private kindergarten, after-school programs and day care are all qualifying expenses. Visit IRS.gov to learn more about tax credits.
Flexible Spending Accounts
Some companies offer their employees Flexible Spending Accounts as a benefit. These accounts allow employees to have from $2,000 to $5,000 a year deducted from their paychecks pre-tax. This money can be spent on health care and child care for the family.
All these tax issues have complexities that are not covered here. To find out how you can benefit the most from federal tax laws, as well as the state and local tax laws that apply to you, ask a professional accountant for advice.