Having a baby is a life-changing experience in more ways than one. But while bringing a child into the mix might work wonders for your family dynamic, your finances might take a serious beating in the process. Fortunately, having a child means getting to take advantage of different tax breaks. Not only can you claim an extra exemption per child on your tax return, but you might be eligible for a number of credits that could collectively result in a refund.
The IRS lets you take a tax exemption for every child you can claim as a dependent. As a reminder, an exemption saves you money by excluding a portion of your earnings from taxes. For 2017, each dependent you have will give you a $4,050 exemption, but if you're a higher earner, you should know that those exemptions begin to phase out at $261,500 for a single tax filer and $313,800 for a married couple filing jointly. And exemptions phase out completely if you earn $384,000 as a single filer or $436,300 as a married couple filing jointly.
Having a baby can also save you money on your taxes by opening the doors to certain tax credits. Unlike tax exemptions or deductions, which merely exclude a portion of your income from taxes, a tax credit is a dollar-for-dollar reduction of your tax liability. The more credits you're able to claim, the more you stand to save.
The Child Tax Credit offers a $1,000 tax reduction for each child you have under the age of 17. However, it does begin to phase out at earnings of $75,000 for single tax filers and $110,000 for married couples filing jointly. Specifically, for every $1,000 you make above these limits, your credit will be reduced by $50. And if you earn enough money, you won't get it at all. The Child Tax Credit is also a non-refundable credit, which means the most it can do is knock your taxes down to $0. However, a related credit called the Additional Child Tax Credit is refundable. If you qualify, that credit might provide a refund if you don't end up owing any money in taxes.
If you need to pay for child care to work after having a baby, you may also be eligible for the Child and Dependent Care Credit, which allows you to claim up to 35% of the cost of qualifying child care expenses, up to a maximum of $3,000 for a single child under 13 or $6,000 for two or more children under 13. This one's a bit trickier to calculate than the Child Tax Credit, but in a nutshell, your credit is equal to 20% to 35% of your child care expenses depending on how much you earn, and only lower earners will qualify for the full 35%.
Finally, there's the Earned Income Tax Credit (EITC), which is a refundable credit designed to benefit low-income households. The credit is based on your income and the number of qualifying children in your household, but the more kids you have, the higher the value of your credit, and the more money you're allowed to earn in order to qualify. Eligibility for married couples filing jointly, for example, is limited to those earning $20,600 or less if there are no children involved. Throw one child into the mix, and that income limit climbs to $45,207.
A new baby can turn your financial world upside down, so it pays to learn more about the ways having a baby can lower your taxes. At a time in your life when you're suddenly spending more money on diapers than you ever could have imagined, every little bit of tax savings counts.