New parents often find themselves overwhelmed by the expenses that come with a baby. From nursery furnishings to "onesies" to countless diapers, your little bundle of joy is going to cost you, well, a bundle. Fortunately, the federal government offers a number of tax breaks to offset the cost of raising a child. Here you'll learn about two tax breaks for which most parents qualify: the dependent exemption and the child tax credit.
The Dependent Exemption
You might be surprised to learn that the IRS does not tax every single dollar that you earn. Instead, the IRS gives you a very modest tax exemption ($3,900 per person in 2013; $3,800 in 2012) to cover your basic living expenses. Single people can take one exemption for themselves. Married couples can take two exemptions (one for each of them).
When you add a new child to your family, you can add one more exemption to your income taxes -- called a "dependent exemption." This means that you get an additional tax deduction every year until your child turns 19 -- a nice baby gift from Uncle Sam!
In terms of actual tax savings, the amount you save with the dependent exemption depends on your tax bracket. The higher your tax bracket, the more savings you get. For example, if you were in the 10% tax bracket, you would save about $390 per child with the dependent exemption. But if you were in the 25% tax bracket, the dependent exemption would save you significantly more.
There is a phaseout on the dependent exemption that applies once adjusted gross income (AGI) exceeds $250,000 (single), $300,000 (married filing jointly), $275,000 (head of household), and $150,000 (married filing separately). For each $2,500 of AGI over the threshold, dependent exemptions are reduced by 2%. This phase-out did not apply for tax years 2010 through 2012 but was reinstated for 2013.
If you qualify for the dependent exemption, claiming it on your tax return is easy. Simply complete line 6C of Form 1040 or Form 1040A, making sure to provide a Social Security number or Adoption Taxpayer Identification Number for your child in column 2. (For more information on this, see Getting a Social Security Number For Your Baby.) Also be certain to complete line 41 of your Form 1040 or line 26 of your Form 1040A.
The Child Tax Credit
The dependent exemption is not the only tax break that parents can claim. Provided that your income is below $110,000 for married couples filing jointly, $75,000 for a single head of household, or $55,000 for a married person filing separately, you can also claim the child tax credit. The child tax credit trims your tax bill by $1,000 per child. Because it is a credit, and not a deduction, the child tax credit gives you $1,000 back in your pocket for every child that you have.
To determine the amount of the child tax credit you can claim, complete the child tax credit worksheet contained in IRS Publication 972, Child Tax Credit. (You can download this publication for free from the IRS website at www.irs.gov.) Then enter the amount of your child tax credit on your tax return (line 51 of Form 1040 or line 33 of Form 1040A). Also complete line 6C of Form 1040 or Form 1040A and provide a Social Security number or Adoption Taxpayer Identification Number for each child. Finally, check the box in column 4 of line 6c for each child for whom you are claiming the child tax credit.
To learn more about the dependent exemption and the child tax credit -- as well as other important tax breaks for new parents -- read Parent Savvy: Straight Answers to Your Family's Financial, Legal & Practical Questions, by Nihara Choudhri (Nolo). You can also find plenty of helpful tax advice on the IRS website at www.irs.gov.