A new baby will change your life, and your finances, in profound ways. That bundle of joy provides more than just sleepless nights and endless love -- your son or daughter also entitles you to some pretty valuable tax breaks.
As you adjust to life with a baby, studying the tax code to find new deductions is probably not at the top of your to-do list. Fortunately, we've made that easy for new parents by putting together this helpful list. When you fill out your 1040, don't forget to take any of the deductions below if you qualify for them.
The dependency exemption
The IRS does not tax every dollar you make. You can claim exemptions for yourself, your spouse, and anyone who is dependent on you. There's no one more dependent on you than your newborn child, so naturally your son or daughter allows you to claim another exemption.
As of 2017, the amount you can deduct for each exemption is $4,050. That's right: Your baby allows you to deduct an additional $4,050 from your taxable income. You can claim the full exemption no matter when your child is born. If your son or daughter makes their debut on Dec. 31, 2017, you still get to take the full deduction for the year.
Exemptions are available regardless of whether you take the standard deduction or itemize. However, higher earners lose this deduction. If you're single, the deduction begins to phase out in 2017 once your adjusted gross income hits $261,500, and you get no deduction at all if your AGI is $384,000 or higher. If you're married and filing jointly, the phaseout for 2017 starts at $313,800, and you cannot take any dependency exemptions at all if your combined income is $436,300 or higher.
The Child Tax Credit
Give your baby a big thank-you kiss, because he or she might have reduced the taxes you owe the IRS by $1,000. That reduction comes from the Child Tax Credit, which is valued at up to $1,000 per child in 2017. It is available regardless of whether you take the standard deduction or itemize.
Because the Child Tax Credit is a credit, not a deduction, it doesn't reduce your taxable income; it directly reduces the taxes you owe. If you would have paid $5,000 in taxes, then now you'll pay $4,000 instead. You can claim this credit every year until your child turns 17, as long as you qualify -- see this IRS publication for more details.
To be eligible for the Child Tax Credit, you must remain below a certain income threshold. For 2017, if a married couple filing jointly makes $110,000, the credit begins to phase out. For couples who are married but filing separately, phaseouts start at $55,000. For other taxpayers, your credit will start phasing out at $75,000 in income.
Your credit is generally limited by the tax you owe, including AMT (alternative minimum tax). It is a nonrefundable credit, so if you only owe $500 in taxes, you'd receive just $500 of your $1,000 credit.
The Additional Child Tax Credit, which is a refundable credit, allows some families with incomes of at least $3,000 to obtain actual cash back from the IRS if their tax bills weren't high enough to deduct the full $1,000 child tax credit. The Additional Child Tax Credit, unless it is extended, will expire on Dec. 31, 2017.
The Child and Dependent Care Credit
If you pay for child care because you're working or looking for work, then you can claim the nonrefundable Child and Dependent Care Credit. This credit is a percentage of your child care expenses, and the percentage is determined by your income.
If your income is $15,000 or less, you can claim a credit for 35% of your child care costs. The percentage of expenses you can claim gradually drops as your income rises; if your income is $43,000 or higher, you're allowed to claim just 20% of your expenses.
No matter how much you actually spend, you can count a maximum of just $3,000 for child care costs for a single child. This means if you made $45,000 and spent $5,000 on child care, you would only be able to claim a credit of 20% of the $3,000 maximum, for a total credit of $600. If you have two or more children, the maximum expense you can use to calculate your credit goes up to $6,000.
You can claim this credit even if you do not itemize your deductions.
The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable credit available to low-income workers. You must have some money coming in to be eligible for the EITC; you cannot take this credit if you earn nothing. However, you also cannot earn too much.
If you aren't claiming a qualifying child, you can take this credit only if your 2017 income is below $15,010 if you're single, or $20,060 if you're married. As soon as you have one qualifying child, you can take the EITC if you have income up to $39,617 if you're single, or $45,207 if you're married.
The maximum EITC is $510 with no children, but it jumps to $3,400 once you have a child. If you have three or more kids, your credit could be as high as $6,318. Because this is a refundable credit, the IRS will send you money if your credit exceeds your tax liability.
You cannot claim the EITC if you are married filing separately. You can claim it regardless of whether you itemize or take the standard deduction.
Taking advantage of tax breaks
Depending on your situation, you may also be able to obtain higher tax breaks by adjusting your filing status to "head of household" (if you're single when you have your child), or to claim additional credits such as the adoption credit. If you're uncertain whether you're eligible for a tax break, it's best to talk with a professional.
Finally, don't forget to file a new W-4 form with your employer to adjust your number of dependents, which will cut your withholding and boost your take-home pay. This little extra cash in your paycheck could really come in handy now that you have another mouth to feed.