Preparing for a new baby can be exciting, stressful, and somewhat terrifying. It’s easy to get overwhelmed with the onslaught of advice that comes with having a newborn. That’s why we prepared a cheat sheet for you on taxes for new parents, so that you don’t need to surf through all the noise and you can focus on what really matters – spending time with your new little one. These tax tips apply exclusively to married parents with one child.
An exemption on your tax return is an amount of money that you are entitled to deduct from your Adjusted Gross Income (AGI). There are two types of exemptions: personal exemptions and dependents. For each exemption you can deduct $4,000 on your 2015 tax return.
If you are married and filing a joint return, you are entitled to an exemption for you, your spouse, and your child. For example, in a family with two parents and one child, the family can deduct $12,000 or 3 x $4,000 from their Adjusted Gross Income.
To claim your child as a dependent you will need to put his/her social security number on your tax return. Social Security Numbers are typically arranged for right after birth at the hospital. However, if you never requested a SSN, you can file Form SS-5 with the Social Security Administration to get a replacement. You will need to provide proof of the child’s age (birth certificate) and proof that the child is a U.S. Citizen.
For 2015 income taxes, new parents can claim any child born in 2015. If your child is born in 2016, you will have to wait until next year to get the dependent exemption.
Child Tax Credit
You may also qualify for the Child Tax Credit which can reduce your tax bill by up to $1,000 for every child under the age of 17.
To claim a child for purposes of the Child Tax Credit, the child must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals, which includes your grandchild, niece, or nephew.
The Child Tax Credit is limited if your AGI is above a certain amount. For married taxpayers filing a joint return, this limitation begins at $110,000. This means that if you and your spouse jointly make more than $110,000 the amount of child tax credit will reduce. In addition, the Child Tax Credit is limited by the amount of the income tax you owe and any alternative minimum tax. If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit. For more information, check out the IRS site.
Child and Dependent Care Credit
If you paid another individual to care for your child who is under 13 years old last year, you may be able to claim the credit on your taxes. The credit can be applied to after-school care and day camps during school vacations.
If you qualify for the credit it can be worth between 20 and 35 percent of your allowable expenses. However, the percentage you are allowed to claim depends on your gross earned income. If you paid for one caregiver you can expense $3,000 and if you paid for two caregivers or more you can expense $6,000.
There are some limitations: (1) The care must have been necessary so you could work or look for work. If you are married, the care also must have been necessary so your spouse could work or look for work. (2) Your child must have been under 13 years old during the year.
To claim the credit, you will use Form 2441 and should include the SSN of each caregiver including their name, address, and taxpayer identification number of your care provider on your tax return.
If dependent care benefits are part of your employer’s compensation package, you will want to look at IRS Form 2441, because special rules may apply.
Remember to always draft up a Child Care Contract with your care provider to outline exactly how your child should be taken care of.
Start a 529 plan
Another tax saving tip is that you may consider starting a 529 plan with your state or another educational institution. Created by Congress in 1996, a 529 plan is a savings plan operated by a state or educational institution that has tax advantages to make it easier to save for college and other post-secondary training for your child.
You still have to pay taxes on any earned income that you put in the savings plan; however, the main tax advantage of a 529 plan is that all earnings of the money in the plan are not subject to federal tax if they are used for the educational expenses of your child. Educational expenses can even include technology. You can start a 529 plan anytime before your child turns eighteen and unlike a custodial account that eventually transfers ownership to the child, the account owner (not the child) calls the shots on how and when to spend the money in a 529 plan.
And while we’re on the subject of preparing for your child’s future, it may be a good time to create a will. If you haven’t drafted one yet, Rocket Lawyer can help you get started. A Last Will and Testament is an important part of your complete Estate Plan that helps you outline how you’d like your last wishes to be carried out, including the care of your children. If you have any questions, you can ask Rocket Lawyer’s network of lawyers to help you along the way. Create your Last Will and Testament today.