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New Baby? Here's How It Will Affect Your Taxes
January 24, 2024

New Baby? Here's How It Will Affect Your Taxes

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New Baby? Here's How It Will Affect Your Taxes.
New Baby? Here's How It Will Affect Your Taxes

There’s an exhilarating learning curve when you have a baby. You master the art of the three-minute shower, learn to make a bottle with one hand and swaddle like an origami artist. You also quickly learn that your baby is dependent on you for everything, but they are also your dependent in a tax sense, which is good news for your bank account.

You won’t find anyone saying, “we’re having a baby for tax reasons,” but there are some important tax perks that come with having children. “From tax credits to deductions, these tax benefits not only ease the economic burden of parenting but also serve as a tangible acknowledgment of the vital role families play in society,” says Donna Stefans, founder and lead attorney at Stefans Law Group PC, which specializes in wealth preservation and tax management.

Whether you’re navigating the sleepless nights of a newborn (congrats and godspeed) or you’re a seasoned parent wanting to make sure you’re getting the biggest refund possible, read on for expert insight on all things taxes for parents.

Child Tax Credit

To be clear, no one (truly not a soul) would claim that having a baby saves you money. But there are ways to make the financial load a little easier to carry. Much like the name suggests, the Child Tax Credit is a monetary credit you may be eligible for just because you have a kid.

“The Child Tax Credit (Form 14815) provides a tax break for families with qualifying children, even if you don’t usually file a tax return,” Stefans says. The amount changes by the year, but here are the specifics for 2023.

For the 2023 tax year, the credit is $2,000 per qualifying dependent child if your modified adjusted gross income (MAGI) is $400,000 or below (married filing jointly) or $200,000 or below (all other filers), Stefans says, adding that if your MAGI exceeds these limits, the credit decreases by $50 for each $1,000 over the threshold. So, if you and your spouse make a combined $405,000, for example, you’d receive $1,750 per child. If you make over $440,000, you won’t be eligible.

While it seems straightforward, it wouldn’t be right if taxes weren’t at least a little funky. The weird part? $400 of that $2,000 we mentioned is non-refundable, meaning it can only serve as a means of getting your tax bill to zero. Let’s say you only owe $200—you won’t be paid out for the remaining $200 in your tax refund.

But here’s the upside: the other $1,600 is refundable, which means you’ll get a check for that amount if you don’t owe any more taxes. Many parents are surprised by that little bump.

What do you need to qualify for the Child Tax Credit?

Well, it goes without saying that you need to have a child to qualify for the child tax credit, and they need to have a social security number—if you give birth in a hospital, they’ll give you the paperwork needed to get that process started. Your child will need to have a first and last name to get an SSN (which may be a motivating factor if you’re having trouble settling on a baby name). You can check out the Social Security Administration website for more info on getting your child an SSN.

Here are the criteria you need to meet to receive the Child Tax Credit, as outlined by Grant Dougherty, EA and founder of Dougherty Tax Solutions.

  • The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of them (nephew, niece, grandchild, etc.)
  • The child must be under age 17 at the end of the tax year
  • The child must have lived with you for more than half the year
  • The child must be a U.S. citizen, national or resident alien
  • The child must be claimed as a dependent on your tax return

I remember seeing bullet three (your child must have lived with you for more than half the year) and feeling slightly panicked because my son was born in October, so hadn’t technically lived with me for half a year. My frantic late-night Googling is your gain—you can claim any child born in 2023, regardless of when they’re born (even if it’s 11:59 p.m. on December 31).

Stefans also adds that you must have provided at least half of the child’s support during the last year. “If the child financially supported themselves for more than six months, they may not qualify,” she says. Unless your kid is a child actor or has a particularly successful lemonade stand, this caveat probably does not apply to your situation, so no need to sweat it.

Who should claim the child if you’re not filing as Married Filing Jointly or are not married?

This is a good question that doesn’t have an easy answer. Not to sound like your OB when you ask them a question and they tell you it’s up to you—but the parent who should claim the baby if you’re not married is really up to you (and guidance from a tax professional who’s familiar with your situation can help here).

Typically, the higher earner will claim the child because they’ll receive a bigger tax break, which is beneficial to both parents if you share finances. If you don’t live with your child’s other parent, then whoever provides housing for most of the year will claim the child.

In situations of divorce where both parents wish to claim the child (only one parent is able to), there is a tiebreaker rule, which you can learn more about on the IRS website.

Child Care Credit

You know before you have a kid that child care is expensive, but it takes on a whole new reality when you see the rough equivalent of a mortgage payment going to daycare or a nanny every month. While American families will shoulder most of the financial impact of child care on their own (at least until universal preschool is widespread), there are some credits available.

“There is the Child and Dependent Care credit, which is a credit that helps offset the costs of child care. The maximum deduction in 2023 is $1,050 for one child or $2,100 for two or more children,” Dougherty says. Welp, it’s better than nothing. Stefans notes that Form 2441 is the designated form for claiming these expenses.

One of the cool things about the credit is that it applies both to working parents and those actively seeking employment.

Adoption Credit

Adoption is expensive any way you look at it, and there is a tax credit available to help offset some of the financial burden.

“For adoptions finalized in 2023, there is a federal adoption tax credit (Form 8839) of up to $15,950 per child,” Stefans says, adding that the 2023 adoption tax credit is not refundable (so sadly you won’t be getting a big check). “The credit applies one time for each adopted child and should be claimed when taxpayers file taxes for 2023.”

There are income limits that affect how much parents can claim. Stefans explains that those with incomes from $239,230 to $279,230 can claim partial credit, and those with incomes above $279,230 cannot claim the credit. CPA Hector Castaneda explains that these income amounts are the same whether you’re filing as single, head of household or married filing jointly. The adoption credit also does not apply to anyone adopting a stepchild, regardless of income.

“You can claim this credit for the expenses of the adoption, such as fees, court costs and attorney fees unless your employer reimburses you. If you do not use up the credit in the year of the adoption, you can carry it forward for five years,” Castaneda says.

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is often confused with the Child Tax Credit given its similarities, says Castaneda.The main difference? You don’t need to have children to qualify for the EITC—instead, it’s a refundable credit for low-to-moderate-income workers who meet certain qualifications.

The credit amount is based on your earned income and the number of children you have, with a minimum awarded if you qualify, even if you have no children. “Having qualifying dependents can boost the amount of EITC you can claim,” Dougherty says, adding that the tax benefits cap at three dependents. The exact qualifications are too in-depth to list here, but you can learn more about who qualifies for the EITC here. And while a lot of people think the EITC and the Child Tax Credit are mutually exclusive, you can (and should!) claim both if you qualify.

FAQ About Taxes For Parents

What day is tax day in 2024?

First things first: Tax Day 2024 is on Monday, April 15. That means your taxes for 2023 need to be filed by then to avoid penalty. The good news is that the countdown to tax season should feel a little less stressful when you learn how to make use of the tax benefits that come with having a child—and whether your first was born in 2023 or your toddler is now a teen.

Do I need to change my tax filing status before having a kid?

While your head is swirling with nursery ideas and baby names in the month leading up to your baby’s birth, you’re probably not thinking about your filing status. If you’re married and filing jointly, you don’t have to worry about changing anything. If you file separately or are a single parent, having a child allows you to file as head of household, “which is a more favorable filing status than single,” Dougherty says. Basically, when filing as head of household, you can take a larger standard deduction, and you will likely receive a greater refund than if you were filing as single.

Other Financial Incentives For Parents

Other than straight tax breaks, there are tax deductions and credits you may qualify for.

529 College Savings Plans

When you look at your swaddled baby, college may be a far-off thought (or a thought that makes you burst into tears), but it’s never too early to start planning. A 529 College Savings Plan is a great way for family or friends to contribute to your child’s education. 529 contributions are not tax deductible federally, but may be deductible on your state income tax (it varies by state). In the long-term, you can take the money out tax-free to pay for college or related expenses, like technology needed for school.

You can also take that money out early to pay up to $10,000 toward private school, and if you’re worried the money will be wasted if your kid doesn’t go to college, they can roll it into a Roth IRA instead (this is a new option as of 2024). Dougherty says that opening a 529 as early as possible maximizes compound interest.

HSA/FSA

You may also want to look into opening a Flexible Spending Account (FSA) or Health Savings Account (HSA) which lets you set aside pre-tax money for things like over-the-counter medicines or even daycare. You may be surprised at the pregnancy and baby products you can buy with HSA/ FSA accounts: think humidifiers, Tums, pregnancy pillows (the true heroes) and so much more.

Regardless of how your baby gets into the world, it’s going to cost at least a little money. These tax tips and government incentives will help you make sure you’re getting as much money back as you can, which is good because diapers don’t grow on trees.

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