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.
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 personal tax exemption ($4,050 per person in 2017 and 2016) to cover your basic living expenses. Single people can take one personal 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 (for the same amount as the personal 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.
There is a phaseout on the dependent exemption that applies once adjusted gross income (AGI) exceeds a certain threshold: $261,500 for singles and $313,800 for married couples filing jointly (2017).
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.
Another tax break parents can claim is the child tax credit. 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 claim a child tax credit of $1,000 per child in 2017 and 2016. Because it is a credit, and not a deduction, the child tax credit gives you $1,000 back in your pocket for every child by reducing your tax liability dollar-for-dollar. If you can't claim the full child tax credit because your tax liability is less than the $1,000 credit, you may be able to claim the additional child tax credit in 2016. You must have at least $3,000 in income to claim the credit which allows you to receive a tax refund of the unused portion of your child tax credit.
To determine the amount of the child tax credit or additional 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, check the IRS website at www.irs.gov.