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Taxes: 6 Sizable Changes When You Have a Baby Thumbnail

Taxes: 6 Sizable Changes When You Have a Baby

Changes to your tax situation are a small portion of the changes your family experiences when a new child enters your household. While just one factor, taxation issues are still significant. Keep reading what to look for, how to handle the change, and how to make the change be positive for your family's taxes. 


Tax changes when you have a baby

#1: Use a Social security number for the first time

The first time you use your young child’s social security will likely be filing taxes. Typically, you completed the paperwork at the hospital to receive a number from the Social Security Administration. If your child was born outside of a hospital, then your family will need to contact a SSA office to go through the process of obtaining a social security number for your son or daughter.


#2: Federal Child Tax Credit

For each child in your family, under the age of 17, you’ll be able to claim a tax credit. The federal child tax credit can help offset other income and help reduce your overall tax bill. Don’t miss out on this benefit.  

 

What's the Difference Between a Tax Credit and a Tax Deduction?


 

 

#3: Child Care Credits

If both spouses work, you may be able to get a childcare related tax benefit. The child and dependent care credit allows families where Mom and Dad are either both working (or looking for work) that meet certain criteria are able to use the cost of childcare as a benefit on their taxes. Eligible families are able to claim a tax credit for proving expenses like daycare. You’ll need to verify eligibility and keep good records, but you may be able to use this credit.

 


 

#4: Itemize for the First Time (medical expenses)

Most families use the standard deduction when filing each year. When you file taxes for a year in which you had a child, it could make sense to itemize. This can make sense when medical expenses, typically large in a year with a new baby, rise above a certain percentage of your family’s income. A qualified CPA should be able to help with the decision about whether to itemize. Make sure you keep records from medical providers, insurance providers, and payment records to have adequate documentation.

 

 

#5: Withholding at Work

When you welcome a new child, it’s a good practice to take a look at withholding on your paychecks at work. Witholding, the amount your employer takes out and sends to the federal and sometimes state government, can be adjusted using a W-4 form. Many employers will let you make updates electronically. You may find that with the addition of a new allowance (withholding jargon for your new child) withholding can be adjusted down. There’s other factors, so look carefully. The IRS offers a free calculator to help estimate if a change is needed.

 


#6: Adoption Credit

If your family adopted a child, then you may be eligible for a tax credit. The IRS has a list of “qualified adoption expenses” they allow to be used as a tax benefit. Some examples include adoption fees, court/attorney fees, and travel expenses. This tax provision extends to older children (up to 18) as well. Be sure to keep good records of expenses and work a qualified tax preparer to get the full benefit.

 


Bonus Tax Change: 529 College Savings Plan

While not automatic, your family could experience a tax benefit from choosing to open a 529 college savings account for your new child. Beyond the benefit of money for future college expenses, there’s some tax benefits behind a 529 plan as well. First, some states will allow you to get a tax benefit for money you put into a 529. This varies by state and is usually a deduction on your state income taxes. Over time, you’ll get a the benefit of 529 money growing without taxes during the time money is in the account. When it comes college time, as long money is used for “qualified educational expenses”, you won’t pay any taxes then either.

 

 

Tax changes are just a fraction of the changes that happen when you welcome a new child, first or otherwise. Don’t forget to keep track of these changes and recognize the benefits where it makes sense.


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