When you become a new parent, you're overwhelmed with things to think about, and taxes are probably last on your list. But parents are offered valuable tax breaks by the Internal Revenue Service (IRS), that weren't available to them before they welcomed a child.
And we know how expensive kids are to raise, feed, and send to college, so any extra money you can scrounge is nothing to scoff at. To capture the tax savings extended to parents, it's important to understand how having a baby can impact your obligations to the IRS. As you navigate the joyful and sleep-deprived world of parenthood, here are four tax tips to keep in mind for the next 18 years.
1. You've got a baby all year long for tax purposes
Even if your baby was born on December 31, 2019, for tax purposes, the new baby counts for the entire 2019 tax year. Don't assume that you aren't eligible for a tax break -- or that your savings will be smaller -- just because your baby was born later in the year.
This means you need to find out which tax credits and deductions parents are entitled to, in order to realize all of the tax savings you're now eligible for. If this is your first child, it will be your first time claiming parental tax breaks, so it may be useful to hire a tax professional to help you navigate this new life milestone that comes with tax implications. If you use a tax preparation software, it should prompt you with a question about whether you welcomed a new baby during the tax year to help you identify the proper parental deductions and credits.
2. You need to get a Social Security number for your baby
You'll need your child's Social Security number in order to claim parental tax breaks -- so make sure your bundle of joy is assigned this identifying number.
For parents who deliver in a hospital, it's easy to get your child's Social Security number. You'll complete a birth registration form, and check the box to get this crucial number for your son or daughter.
But if you birth your baby at home or in a birthing center you may need to visit your local Social Security Administration (SSA) office. There, you'll complete Form SS-5, Application for Social Security Number, and provide the parents' Social Security numbers, and proof of your baby's identity, age, and citizenship status. Birth or medical records, including a birth certificate, should be sufficient for your baby, while you'll need your own passport or driver's license.
3. Your baby may entitle you to new tax credits and deductions
With babies come tax breaks. Some potential credits you may become eligible for as a new parent include:
- The Earned Income Tax Credit (EITC): You can qualify at a higher income threshold for this tax credit by adding a baby to your family -- and you can qualify for a higher credit with the addition of new children. In fact, going from no qualifying children to one qualifying child could make your credit more than six times larger.
- The Child Tax Credit: This credit is worth up to $2,000 for a qualifying child, and as much as $1,400 of it is refundable, so if your tax liability is zero, you receive the balance in cash. Although this credit has income limits, and it phases out and eventually disappears, these income limits are quite high, so most families qualify.
- The Child and Dependent Care Credit: Depending on your adjusted gross income (AGI), this credit could be worth between 20% and 35% of qualifying child care expenses, up to a maximum of $3,000 for one qualifying child, and $6,000 for two or more kids.
Remember, tax credits provide a dollar-for-dollar reduction on your income. This means that if you owe $5,000 in taxes and get a $2,000 child tax credit, you can save $2,000, bringing your tax bill down to $3,000. If the credit is fully or partially refundable, like the EITC and Child Tax Credit, you can even get back more money from the IRS than you paid into the tax system.
If you incurred substantial medical expenses in delivering your baby, you could deduct care expenses that exceed 10% of your household income in tax year 2019 -- but you'll have to itemize on your tax return to claim this deduction, rather than taking the standard deduction.
4. Consider adjusting your withholding after your baby comes
The tax credits your child entitles you to could substantially reduce your tax bill. To make sure you don't end up overpaying the IRS during the year, consider adjusting your withholdings to account for your new family situation.
If you work at a company with a human resources department, ask if you can fill out a new W-4 form to reduce the amount withheld from each paycheck in taxes. Having this extra money during the year can come in handy when you have to incur all the expenses that come with a new baby, like diapers, baby food and child care.
Make sure you understand your new tax situation as a parent
Because a new baby can mean big changes to your taxes -- especially if the child is your first -- it's important to understand the IRS rules that now apply to you. These tips can help, but you may also want to consider getting some tax advice so you can maximize the tax savings your bundle of joy provides for your family.