New parents have a lot to think about now that their bundle of joy has come home. With so much on weighing on their minds, the complexities of the IRS tax laws are probably the last thing they are worried about.
Yet, when tax time comes around, parents have a variety of ways in which they can save on their bill to Uncle Sam. That’s why it is so important for parents to know all of the advantages available to them in the form of credits and deductions. Both can really make a difference in helping to alleviate what they owe in taxes each year.
We are here to help all of those beleaguered parents. They can use these helpful hints to navigate the tax code in an effort to save some money. This would likely be of great benefit to those of you who are realizing only now that babies and children can be very expensive.
Some of the credits and deductions that the IRS provides are designed specifically to offset the costs of raising a child. We are going to point out all of the tax breaks that many new parents commonly overlook. Plus, we will provide other mistakes that you should be careful to avoid when you’re filling out your tax return for the year.
Your Child’s Social Security Number
The first step is to claim your child as a dependent and take all of the deductions and credits that come with it. Therefore, you must get your newborn his or her own Social Security Number. The IRS insists upon your baby having a dedicated SSN.
This is because it is the only way they can verify that your child exists. You are entitled to the tax breaks that you are claiming. You can even think of it as helping your child build credit from scratch!
Most hospitals provide assistance in getting your child their number at the same time you put in a request for your child’s birth certificate. It only benefits the parents to get that number as soon as possible so they have it for their return.
Not having the number can prove problematic when tax time arrives. Without it, you will be forced to file a Form SS-5 with the Social Security Administration. It declares the age of your child, his or her identity, and proof of U.S. citizenship.
You will also face a fine of $50 for every dependent you claim that does not have a valid Social Security Number. In addition, your refund could be tied up for months. That is due to the fact that the IRS takes the time to verify the validity of your claim on a dependent.
Taking the Dependent Exemption
Most parents are probably all too eager to take the dependent exemption for their child. However, many filers are sometimes unclear on whether or not they can do so based on when their baby was born. The good news is that it doesn’t matter if your baby is born on January 1 or December 31. You can take the exemption.
Some parents mistakenly think that if their baby was born on or near the end of the year that they are ineligible to take the exemption. That is not true! Let’s say your child came into this world with just a few days left on the calendar for the year.
Thus, you are entitled to take the whole year’s worth of exemption. Don’t worry about pro-rating or figuring out any difficult math for claiming only part of the year. If your child was born in that tax year you get to claim the whole thing.
As for the exemption itself, it allows for you to safeguard $4,050 of income from taxation for the year. That saves up to $1.012.50 for filers in the 25 percentile tax bracket.
Neglecting to Claim the Child Tax Credit
If you have a new baby or any age child under 17, you want to take the Child Tax Credit. It can be worth up to $1,000. Most taxpayers are eligible to claim it, regardless of income.
However, it does phase out for filers for high earners. Before you can do so, you and/or the child for whom you are claiming the credit must meet the IRS’ criteria for eligibility. There are seven such qualifying factors, which are listed as follows:
There are seven such qualifying factors, which are listed as follows:
The child must be 16 years of age or younger by December 31st of the tax year you intend to claim the tax credit.
2. Relationship Between You and the Child
Any child you wish to claim for the credit must be your child, your stepchild, or a foster child that has been placed in your care by an authorized state agency or a court. He or she may also be a child adopted by you through a legal adoption process.
It must either be concluded or still ongoing by December 31st of the tax year you intend to claim the tax credit. Siblings can also qualify. Additionally, you may claim the descendants of individuals who qualify should they meet the other requirements set forth by the IRS.
3. Financial Support
A child may only qualify if they have not provided over half of their own financial subsistence by December 31st of the tax year you intend to claim the credit.
4. Claiming as a Dependent
The child must be eligible to be claimed as a dependent on your tax return. That requires the child be related to you either by law or by blood. They must be under the age of 19. Additionally, if they are under the age of 24 they can be claimed.
They need to be a full-time student for more than five months of the year. Also, they have had to live in your household for more than half the year. A child that has not provided their own financial support for over half the year or is permanently disabled also allows them to be claimed as a dependent.
5. Citizenship Requirement
The child must be a U.S. citizen, a U.S. national, or U.S. resident alien.
Any child you wish to claim in order to receive the credit must have lived in your household for more than six months. Additionally, there are other circumstances in which this requirement may be met if there are temporary absences by you or your child for these reasons.
They include attending school, going on vacation, medical or business reasons, military service, or incarceration in a juvenile facility. These may count as time the child spent living with you. In addition, any child who was born or who passed away during the tax year will count as having lived with you for the full year.
7. Family Income
The amount you may receive from the Child Tax Credit is lowered if your modified adjusted gross income is above a specific threshold, as per your tax-filing status. The threshold for married couples filing separately is $55,000, $75,000.
For single filers, threshold requirements include being head of household, and widow/widower, and $110,000 for married filing jointly. The way the credit reduction is by taking away $50 for every $1,000 of income you make over your applicable threshold.
The Child Tax is non-refundable, meaning you may only receive it to lower your tax liability. You may not collect that money as part of a refund. Therefore, if you do not owe anything on your taxes for the year, then the credit is unused.
Though, you might have a chance to claim the Additional Child Tax Credit. That is because it can be collected as part of a refund. To determine if you qualify for the Additional Credit, you can fill out Form 8812.
If you adopted a child during the tax year you can claim this credit. it is intended as a way to defray some of the costs that come with the often lengthy and overwhelming adoption process. Parents who are looking to adopt could end up spending a lot.
It’s an average of $30,000 by the time they go through the whole process and pay all of the fees that come with it. Yet, with the Adoption Tax Credit, the majority of adoptive parents could see up to $13,450 in credits per each qualifying adopted child.
There are specific requirements for eligibility to receive the Adoption Credit. There are also additional tax breaks that adoptive parents may qualify for. they are based on factors such as the adoption of a special needs child or if an adoption is ultimately unsuccessful.
Claiming the Adoption Credit
In order to take the credit, you are going to need to qualify (we’ll get to that in a minute). You will also need to fill out a Form 8839.
This is where you will report all of your qualified, itemized expenses for the tax year. The credit is non-refundable. That means that you can only receive the money to reduce your tax liability. You won’t receive any of it in the form of a refund.
The maximum credit per qualifying child is $13,450. In order for a child to qualify they must be under the legal age of 18, Also, if they are unable to care for themselves, either physically or mentally to qualify. In the latter case, age is no longer a qualifying factor. The person may be over the age of 18.
In order to claim certain expenses toward the credit, they must be directly related to the legal adoption of a child. They may include costs such as court and attorney’s fees, traveling expenses, and home study costs.
However, while most adoptive parents will likely qualify, some may not due to the amount of money spent in the process of pursuing an adoption. You may claim the maximum on the credit only if you spent that much in qualifying expenses. Additionally, if you were not reimbursed by any other parties such as an employer or state-governed agency, you qualify.
The credit will only provide you with monies equal to the amount you spent. Thus, if you spend less than the maximum $13,450, you will only receive that amount instead. For example, if all of your qualifying expenses add up to $3,780 that is all you can claim under the credit.
Anyone attempting to claim the credit with a modified adjusted gross income that exceeds $201,920 will find the credit is reduced. That’s until modified adjusted gross income is $241,920 or higher, at which point the credit becomes unavailable.
Claiming the Adoption Credit for Special Needs
Parents who adopt a child that qualifies under the federal government’s definition of “special needs” are allowed to claim the maximum amount of the Adoption Credit. It does not matter what they spent during the adoption process.
Any filer attempting to claim the tax credit under a special needs exemption must be sure that the child in question meets all three of the following requirements:
- The child must be a citizen or a resident of the United States.
- The child must not or could not be returned to the home of the birth parents.
- The child likely would never have been adopted without some form of financial assistance
It’s important to keep in mind that the Adoption Credit is only applicable once. It is for the tax year in which you underwent the adoption process and spent your related expenses.
You may not take it for any years following the adoption. That is because from that point forward your adopted child is considered your dependent. Thus, you may only take the applicable deductions and/or credits that might apply.
Claiming the Adoption Credit for an Unsuccessful Adoption
It is unfortunate but it happens. For whatever reason, an adoptive parent can be unsuccessful in completing the process of adopting a child.
If this applies to your situation, you may claim the expenses that were incurred during the process, up to the maximum. You are not entitled to the maximum by default. It’s only is for the qualifying expenses that you spent.
Claiming Employer-provided Benefits
Filing your taxes after an adoption may qualify you for certain adoption benefits from your employer. Under the IRS tax code, these are benefits paid for by your employer, either to you or to a third party on your behalf.
Additionally, these amounts may be excluded from your taxable income, up to the maximum $13,450. You may only use these expenses to qualify for the exclusion. Y can’t use them to qualify for the credit. Conversely, you are allowed to take the maximum on both counts, should you be eligible to do so.
Filing a Return for the Adoption Credit
Most of us now rely on electronic filing methods through the various tax preparation companies or the IRS itself. However, if you are an adoptive parent intending to take the Adoption Tax Credit, you must still file a paper return.
This is mainly because you will need to submit a formal adoption certificate that has been signed by a judge. If you are filing under special needs criteria, you will need to submit state and/or county issued documentation to that effect.
Be cognizant of the fact that Form 8839 is not accepted electronically either and filing all of the necessary forms and certificates via the mail can also delay your refund.
Failing to Maintain Expenses for Care Providers
If you are a working parent who relies on babysitters, nannies, or daycare programs, you can deduct these costs from your taxes. However, many parents fail to obtain the proper adequate records for the many care providers they may employ during the tax year.
That can cost them dearly. Any filer who attempts to claim the Child and Dependent Tax Credit must be able to provide specific identification. This includes the Tax ID or Social Security Number of any care providers they employ during the course of the year. Without that information, the IRS will likely deny the credit.
You may also qualify for the credit if your child is enrolled in a summer camp while both parents are employed, looking for work, or enrolled in school, and the child in question is under the age of 13. Then, the costs of the camp may also qualify for the Child and Dependent Tax Credit. It’s important to be sure you have all of the necessary information from the camp in order to claim that expense.
Claiming Head of Household Status on Your Return
This tax break is overlooked the most by single parents. They may not be well-versed in all of the benefits that come with filing as a head of household on their return. It allows the filer to claim dependents. Additionally, it offers other advantages that can help to lower your tax liability.
In order to qualify to file as a head of household, you must have paid more than 50% of the costs related to maintaining the household in which you and your children live throughout the year. You must have also lived in that residence for more than half the tax year.
Money spent toward the costs of education, including tuition, fees, supplies, and other related expenses, can make you eligible for claiming tax credits. They can reduce the actual taxes owed from your liability, dollar for dollar.
Accordingly, if you are new parents attending college while caring for their baby or have an older child attending instead, you’re in luck. There are two tax credits that you may be eligible to claim.
They are based on your education, and how much it cost you for the year to attend that school. These are the American Opportunity Credit and the Lifetime Learning Credit.
The American Opportunity Credit
This could equal up to $2,500 per year for every qualifying student. The credit can reimburse you up to the first $2,000 in education costs like those named up above. That is, as long as those expenses qualify. You could also receive up to 25% on the following $2,000 after the initial portion.
In order to qualify, the American Opportunity Credit is applicable only to four years institutions such as colleges, universities, vocational institutions and for-profit and non-profit facilities. You would receive up to 40% of the credit as part of a tax refund. Plus, you could get $1,000 for every qualifying student.
The Lifetime Learning Credit
For those who don’t qualify to take the American Opportunity Credit, you could still be eligible for the Lifetime Learning Credit. It’s an easier credit to qualify for when it comes to most of the requirements involved.
It could pay out 20% of your initial $10,000 spent on post-secondary tuition and fees, up to a cap of $2,000 per year. There are no minimum enrollment restrictions either. Therefore, you can be in school for a year and still possibly qualify for the credit.
Making the Most out of Savings Plans
Now that you have a child it makes sense to start thinking about saving for the future. That means you may want to start looking into the various investment vehicles that exist for securing that nest egg. It’s never too early to being putting money away for college. One of the best ways to do that is through a 529 account.
Parents can start to squirrel away after-tax money into these accounts and watch it increase, tax-free. The only catch is that you must spend it on tuition costs. Not only are you preparing to give your child an education but you’re doing it with some pretty good tax advantages as well.
There are also Coverdell education savings accounts which include a limit of $2,000 on annual contributions. Though, you can get tax breaks. In fact, there are a number of ways to benefit from saving and it can be a big help for new parents who are looking for some relief.
Our Final Thoughts
Now that you have a new baby, your life is going to change in so many ways. One of which will be how you file your taxes. Since that’s the case, you want to find out how that can work to your advantage. and we hope this guide prevents you from missing out on all of the tax breaks to which you are entitled now that you are a Mom or a Dad and you have to
We hope this guide prevents you from missing out on all of the tax breaks in which you are entitled now that you are a Mom or a Dad and you have to budget for a new baby.