How Does Having A Child Affect Your Taxes? Here's What You Need To Know About Your "Bundle Of Credits"
What many new parents may not have at the front of their minds when becoming first-time parents is the paperwork, taxes, legal documents, and other "adulting" things that come with having a baby — and I'm definitely in this boat. We are more focused on the health of the baby, whether the nursery is finished, and getting everything stocked and ready to go for when baby comes into the world. However, all the "adulting" stuff is definitely important, especially when it comes to your finances. So how does having a child affect your taxes? Believe it or not, there are quite a few "perks," if you will, for having a baby. Other than having a sweet baby and lifelong family member, of course.
In an email interview with Romper, Lydia Desnoyers, CPA, CFE and owner and founder of Desnoyers CPA, LLC, says, "First, I’d like to congratulate new parents on their new bundle of ‘tax credits,'" showing that even CPAs can have a sense of humor — and though funny, she is absolutely right about those tax credits and perks. There are many different incentives you can take advantage of once you file your taxes and claim your newborn baby. And all of the CPAs I interviewed said it's important to tell your CPA or other tax advisor you're having a baby as soon as possible.
Brent Knowles, CPA, tells Romper, "Some [CPAs] may want to know sooner, but I would say let them know before the start of the tax season in case they may have more questions to ask before you supply your tax information." Plus, there could potentially be some tax deductions for medical bills you incur while pregnant, according to a Top Tax Defenders article. So what are these perks and things you need to know about filing taxes once your new family member arrives? These CPAs have you covered.
1. Your Baby Needs A Social Security Number First
Knowles says it's important to apply for a social security number for your baby right away, and that you can do this while getting the birth certificate information in order in the hospital. Desnoyers adds, "Even if the baby is born in December and you don’t get the tax I.D. until January, that is fine, but you do need that social security number in order to claim them."
I don't know if it's this way in other hospitals, but when I recently went for my hospital tour of where I'm going to have the baby, they said someone from the Social Security Office comes around to get that information and help you apply all while getting the birth certificate in order.
2. The Baby Must Be Born On Or Before Dec. 31 Of The Tax Year
Once your baby is a "real person" and has a social security number, as long as they were born between Jan. 1 and Dec. 31, you can claim them on your tax return for that year. "Some people think that the baby had to have been alive for more than half the year," says Desnoyers. The fact is if they are born at 11:59 p.m. on Dec. 31, they can be claimed, she explains.
3. The Tax Credit Per Child Has Gone Up To $2,000
According to an article on The Fool, and Desnoyers, the tax credit has gone up to $2,000 — $1,000 more than last year. "Starting in 2018, the child tax credit has doubled, so your newborn might get you a $2,000 credit. The income threshold has also been raised: Single filers can claim the credit with incomes up to $200,000, and married couples can get their credit with a household income as high as $400,000 on a joint return," The Fool reported.
Remember, a tax credit is different than a deduction. And according to The Fool, "Credits are much more valuable, because while a deduction reduces your taxable income, a credit gives you a dollar-for-dollar reduction on the taxes you owe."
Mark Kohler, a CPA and senior tax advisor at TaxSlayer, also tells Romper that you should "keep in mind the age cut off is 17 and the child must be under 17 at the end of the year for taxpayers to claim the credit."
4. If Both Parents Work & Your Baby's In Day Care, You Can Get A Credit
"If you put your child in day care, you can get up to a $600 credit based on up to $3000 of expenses per child. Note that the total credit allowed on a return is capped at $1,200," Desnoyer says.
5.You Can Get A Pre-Tax Deduction Of Up To $5,000 In A Dependent Care FSA Through Your Employer
Investopedia noted that dependent care FSAs are where "participants authorize their employers to withhold a specified amount from their paychecks each pay period and deposit the money in an account. Instead of using the FSA money to pay for expenses directly, you pay those costs out-of-pocket and then apply for reimbursement."
According to Desnoyer, "If you’re in the 24 percent tax bracket (which the average American will be), that can translate to a $1,200 savings."
6. You Can No Longer Claim A Personal Exemption For Your Baby
According to an article on The Fool, unlike in 2017 where parents could claim a $4,050 personal exemption for their new baby "and for older kids," now, "personal exemptions disappeared with tax reform."
Kohler has some additional practical advice for what you can do with all these credits and deductions — even if you want to spend it on all those diapers or a trip to Disney World, which works, too. He says consider opening a Coverdell IRA College Savings Account. "You can contribute up to $2,000 before April 15 to qualify for a 2017 contribution, and the same goes for the following year. This money can grow tax-deferred, meaning it will compound quicker since you won’t be paying taxes on any capital gains. This money can be used not only for college expenses, but also for elementary, middle, and high school expenses." Pretty smart stuff. He also adds that withdrawals are free from federal taxes, as long as you use the money for school expenses. "Note this is a tax savings and not tax deducting opportunity," he says.
Kohler also suggests utilizing a Health Savings Account for medical bills for your family, "... as you can also get a tax deduction for contributions on your tax return – up to $3,400 for singles and $6,750 for families in 2017. These accounts grow tax free and come out tax free for any family medical expense."
So not only is having a baby a wonderful addition to your family in an emotional and life-changing way, but it seems like it's a pretty lucrative financial decision. And as Desnoyer says, "Congratulations on your new bundle of tax credits."
Check out Romper's new video series, Bearing The Motherload, where disagreeing parents from different sides of an issue sit down with a mediator and talk about how to support (and not judge) each other’s parenting perspectives. New episodes air Mondays on Facebook.