The Tax Benefits of Becoming a Parent
Congratulations new parents! Your exciting journey has just begun!
You may be wondering what tax benefits your family is eligible for now that you have a new member of the family. Below are several factors that will help your family keep the most money come tax season.
Before you can take advantage of these great incentives, first you must obtain a Social Security Number for your child. This is extremely important. It is a surprisingly easy process as you can request a Social Security Number while applying for a birth certificate at the hospital. You will need the Social Security Number to claim your child as a dependent on your tax return. If you fail to do so, the IRS will fine you $50 and your refund could be delayed.
1. DEPENDENCY EXEMPTION
Claiming your child as a dependent on your tax return will protect $4,000 of your income from taxes. This can potentially save you $1,000 if you are in the 25% tax-bracket. You will also receive the full year’s exemption regardless of when your child was born or adopted during the year.
2. CHILD TAX CREDIT
A child enables you to receive a $1,000 tax credit every year until he or she reaches the age of 17. Unlike an exemption, which reduces the amount of income the government is allowed to tax, a credit actually reduces your total tax bill, dollar for dollar.
3. INCREASE YOUR TAKE HOME PAY
Claiming a dependent will reduce your tax bill. You can decrease your tax withholding from your paycheck by completing a new W-4 form. Additionally, the IRS does not pay interest on the excess withholding.
4. HEAD OF HOUSEHOLD FILING STATUS
If you are a single parent you may be able to file as “Head of Household” instead of filing as a single person. This allows you to claim a bigger standard deduction and more profitable tax brackets. To qualify for the Head of Household filing status you must pay more than half of the total cost of providing a home for your child.
5. CHILD CARE CREDIT
You may be eligible for a child care credit if you have a job that requires you to work outside of the home. To receive this credit, the income from your job must be taxed and you must place your child in day care during work hours. This only applies for each child under the age of 13. The credit amount will depend on the cost of day care and your income.
6. IRAS FOR CHILDREN
Luckily, setting up an IRA can be a moderately small investment when your child is young, and with tax-deferred compounding, it can grow substantially over time. However, the child’s IRA account must be funded from earned income; monetary gifts and investments do not count. Relatives are allowed to contribute to the IRA but it is limited to the lesser of $5,500 a year or 100% of the child’s earnings.