Taxes and Parenting

Source Practical Money Skills

Believe it or not, there is a financial advantage to having a child. You not only gained a loved one, you also gained a dependency exemption you can deduct on your tax return.

Apply for a social security number for your child within a year after his or her birth. That will make the baby “official” in the eyes of the IRS and that’s the first step in getting your deduction.

Who is a Dependent?
There are five requirements that a person must meet to be your dependent.

1. This person must be a relative or at least have lived in your home as a family member all year.

2. If the person is married, he or she can’t file a joint return. This probably isn’t a consideration for a newborn.

3. This person must be a United States citizen, resident alien or a resident of Canada or Mexico.

4. This person must have a gross income of less than $3,000, unless the person is under the age of 19 or a full time student under the age of 24.

5. You must have provided more than 50% of the person’s total support for the tax year for which you are taking the deduction.

Tax Credits
Tax credits differ from deductions in that they don’t just lower your taxable income, they actually directly lower the tax you owe. So a $1 tax credit will lower the tax you owe by $1.

If you pay for someone to take care of your child, for example day care or a nanny, you may receive a tax credit equal to 20% to 30% (depending on your income) of qualified childcare expense, up to $2,400 for one child or $4,800 for two or more children.

Be sure to keep all payment records, including receipts, for all childcare expenses. You will need them to substantiate your expenses. Nursery school, private kindergarten, after school programs and day care are all qualifying expenses.

Flexible Spending Accounts
Some companies offer their employees flexible spending accounts [from Employer Provided Benefits] as a benefit. These accounts allow employees to have from $2,000 to $5,000 a year deducted from their paychecks pre-tax. This money can be spent on healthcare and childcare for the family.

All of these tax issues have complexities that are not covered here. To find out exactly how you can benefit the most from federal tax laws, as well as the state and local tax laws that apply to you, ask a professional accountant for advice.