Having a baby puts you on the hook for years of expenses, but the good news is that several new baby tax breaks are coming your way! Be sure to explore everything that’s available to you and take advantage of whatever you can. Here’s the lowdown:
Child Tax Credit
You’ll receive a $1,000 child tax credit the year your baby is born, and you’re eligible for this credit every year until the child turns 17. The credit is subject to income restrictions, and it starts phasing out at $75,000 for single and head of household filers and $110,000 for joint filers.
Child Care Credit
The IRS offers a child care credit to help offset the expenses, and it ranges from $600 to $1,050. In order to qualify, you must pay for child care in order to work and earn taxable income. If you’re paying for more than one child under 13, the credit doubles to between $1,200 and $2,100. What you’ll have to pay is based on your income and how much your child care costs, but you can claim up to $3,000 in child care expenses for one child and $6,000 for two or more.
If your employer offers a child care reimbursement account via a Flex Plan, then you can allocate up to $5,000 of your salary to pay for child care, tax free. You can’t use both options, but you can use the Flex Plan for the first $5,000, and then the Child Care Credit against additional funds spent.
Earned Income Tax Credit
This credit is available to low-income workers and can greatly reduce or eliminate your tax burden. It’s computed based on your income and the number of children you have, as well as your filing status.
New Dependent Exemption
When you file your federal tax return, you will claim a new dependent for the year your baby was born and receive a $3,650 exemption. If you hit a certain income level, the dollar amount will be reduced, but you will still receive at least $2,433.
Increased Take-Home Pay
File an updated W-4 form with your employer that shows an additional dependent, and you will reduce the amount of money withheld each month. This results in more cash each month to help with your additional expenses. Short-term loans are available if you get in a cash crunch, so explore those options ahead of time so you’re ready if you need them.
If you’re single and you pay over half the costs of providing your new baby’s home, you can change your tax filing status from “single” to “head of household.” This provides a larger standard deduction, plus different tax brackets, which might be beneficial for your situation.