There’s no question that having a child will change your life. A new child also adds many new costs, but the bright news is the American tax code is written to help families with some of these expenses.
The IRS offers a variety of tax credits, deductions, and other incentives that could lead to a smaller tax bill when you have a child. But this also makes your taxes more complicated.
Here’s some of the credits your new child means as you file this year’s return.
When you have a child, you can claim an exemption that will reduce your taxable income by $4,050. And for each child, you get to claim another exemption, according to Wisebread.com
You get an additional break on your taxes by adding a member to your family. Reduce your tax bill by $1,000 for every dependent in your household. This usually includes any family member 17 or under that lives with you, including adopted and foster children, etc. If you are the primary caregiver. The benefit is reduced once you reach $110,000 gross income if filing jointly, or $75,000 if filing alone.
When you have a child, you can begin saving for college and get tax breaks. The most popular is a 529 college savings plan, that lets you deduct contributions from your taxable income. Gains on the investments in a 529 plan also are not taxed.
You may not worry about health care expenses, but they become more of an issue when you have kids. Many employers offer health savings accounts (HSAs), which let you divert money into an account to pay for health care expenses you might accrue. Any money placed in an HSA is deducted from taxable income. You may find it’s worth contributing to an HSA if your child has health issues, or if you have a health insurance plan with a high deductible, the site shares.
Planning to scale back your retirement savings to meet the financial demands of a new child? It’s important to know how it impacts your tax bill. Any contributions placed in a 401(k) or traditional IRA are deducted from your taxable income, so if you are putting less aside, your tax bill may be higher. You’ll be able to save at the same rate, but if not, expect to pay more in tax.
Many families find their gross income decreases after having a child because one parent stops working full-time or totally. Lower income means lower taxes, and maybe a lower tax bracket. This lower tax helps take the pain out of having less income overall, and in some cases, you may even end up with more take-home pay.
The IRS lets parents save money on taxes if they pay someone to care for their children. This is good for working parents. The child and dependent tax credit offers up to $1,050 for one person receiving care, or $2,100 for two or more. Poorer families can get 35 percent back of any qualifying childcare costs, Wisebread.com says.
When you have a child, you may need to expand the home with more space. You can’t claim the cost of home improvements on your taxes. But, any home upgrades will be added to the cost basis of the home.
If you adopt a child, you get some significant tax breaks in addition to those listed above. The Federal Adoption Tax Credit gives families a maximum of $13,460 to offset qualified adoption expenses. This can include adoption fees, court fees, travel costs, and attorney fees, among others. Parents who adopt a child may also get additional tax credits from their state, Wisebread.com says.