There’s no doubt the birth or the adoption of a child is one of the most significant life changes you will ever experience. Life as you know it will change in every way, and your tax status will change as well. Here is a brief look at some of the popular child-related tax programs.
Note: all figures on based on the 2014 tax year.
Dependency Exemption: As of 2014, claiming your child as a dependent will protect $3950 of your income from taxation, saving you $975.00 if you are in the 25% tax bracket.
Child Tax Credit: Even if your child was born later in the year, you can still claim the $1,000 Child Tax Credit. As with any credit, it phases out as income increases, and disappears altogether at over $110,000 for married filing jointly, and at $75,000 for single head of household taxpayers.
Low-income parents may receive a refund if the amount of the credit exceeds their overall income tax liability.
Adoption Credit: If you adopted a child, you can offset the adoption costs by up to $13,190.00 as of 2014. If you adopted a child with special needs, you can claim the full credit amount, even if the actual adoption itself cost less.
As with any tax credit, the Adoption Credit phases out and will disappear altogether as income rises.
Earned Income Credit: This credit will benefit you if you are in the low-income range. Based on the number of children claimed, the Earned Income Credit will phase out at different income thresholds for both married and single taxpayers. For example, in 2014 the income limit for married taxpayers with one child was $20,020 and $14,590.00 for single parents with one child.
Income tax limits change each year, so be sure to have the most current information available to you on tax day.
Child Care Credit: If you pay child care costs for one child under 13, you can earn a Child Care Credit between $600.00 and $1050.00. The credit increases to between $1200.00 and $2100.00 for two or more children under 13. The actual credit amount depends on your income and how much you pay for child care, so hang on to those child care receipts or statements. You will need them on tax day.
If your Adjusted Gross Income (AGI) is $15,000 or less, you can claim up to 35% of qualifying child care costs. As your income rises, the percentage can drop to 20% of qualifying costs.
Your Filing Status
If you are married, your filing status won’t change. If you are a single parent however, you may be eligible to file as Single Head of Household. In order to qualify, you must be paying more than half the cost of providing a home for a “qualifying person,” and your new child qualifies.
Be sure to file a new W-4 with your employer so you can claim an additional withholding allowance. Doing so will reduce the amount of tax deducted from your paycheck. If your employer offers a child care reimbursement account, also called a Flex plan, enroll as soon as you can, even if you have to wait until the next “open enrollment” period. In many cases, you can divert up to $5,000 a year into a designated account that you can later access to pay child care expenses.
However, you can’t utilize both the Flex account and the Child Care Credit, so it pays to talk to a knowledgeable tax pro about your specific concerns. They can help you determine which course of action is best for you and your family.
Welcoming a first child into your family is one of life’s most significant changes on all fronts. Adding a child to the mix will also change your personal life, finances, schedule (sleep? what’s that?) in ways you never thought possible.
The joy of welcoming a first child also carries with it new financial responsibilities and tax obligations, so having a tax pro to help you navigate your new tax obligations will get your newly expanded family off to a great start this tax year and in years to come.