When you're a new mom or dad, the cost of raising a child can cause some serious sticker shock. Fortunately, the U.S. government tries to ease those costs by offering several significant tax breaks for nearly every year your child is financially dependent on you. Here's a closer look at tax advantages for parents:
The Dependent Exemption. If you have ever wondered why you can enter yourself as a "dependent" on your tax form, it's because the government considers that you have basic living expenses, and therefore it doesn't tax every single dollar that you make. In 2010, the dependent tax exemption was $3,650 per person (the exception: those with extremely high incomes). Since you have a new person in your family, you can claim one more dependent on your taxes, which means you get an additional tax deduction of around $3650 a year until your child turns 19. It doesn't matter what month your child was born or adopted; if she was born on New Year's Eve before midnight of last year, you will still be able to claim the exemption for the entire year. If you are in the 25% tax bracket, that means an extra $912 in your pocket, thanks to your new son or daughter. Sweet!
To claim the benefit, you must have a social security number for your child, so if you didn't get that into the works at the hospital, you'll need to file a Form SS-5 with the Social Security Administration. Go to socialsecurity.gov for a form and to learn what to do once you've filled it out.
Also, since your tax bill is being cut, you can receive more take-home pay. Ask your employer for a new W-4 form so that you can add your new dependent to it.
The Child Tax Credit. If you thought the dependent exemption was good, wait until you learn about the child tax credit. With each new baby you have, you will receive $1,000 back from the government. This is a credit, not a deduction, which means that you will actually receive $1,000 just for having a child (if you wind up owing the government money, this amount will be subtracted from what you owe; otherwise, you're getting an estimated $1,000 "raise" until your son or daughter turns 17!). This credit is given only to married couples filing jointly whose incomes are $110,000 or less; single parents earning $75,000 or less, and married moms or dads filing separately who earn $55,000 or less.
The ChildCare Credit. If the company you work for offers a child care reimbursement account (often called a Flex Plan), it pays to look into it. These accounts let you divert up to $5,000 of your salary a year into a tax-free account—but the money in the account must be used for childcare. If your company does have such a plan and you take advantage of it, however, you can't also claim the child tax credit described above. You must choose one over the other. Your human resources representative will help you compare what the two options offer so that you can select the one that best benefits your family.
The Adoption Credit. This tax credit helps you with the cost of adopting a child, either foreign or domestic. For 2010, the maximum you can receive is $13,170 (again unless you are affluent and making around $200,000 a year). Even if you owe no tax, you can receive the adoption credit so no adoptive parent should overlook this tax advantage.
529 Education Savings Plans. While these college-savings plans are not tax-deductible, the earnings on them are tax-free and the payouts are tax-free as well. All 50 states and the District of Columbia offer 529 plans and many offer more than one plan. You don't need to sign up for your own state's plan, but consider your own first anyway since it may offer a break on your state tax. Visit your state's website for details, and check out the site 529s.com to look at a state-by-state comparison of plans. Thanks to the generosity of Uncle Sam, you may be able to start saving for your little genius's college costs before she can even say "goo-goo!"
This article was written by the publishers of Parents and American Baby magazines.
It's called formula for a reason™