Having a child affects your taxes more than most other areas of life. A tiny human has changed your priorities, your sleep schedule, and your money.
You’ve probably been too sleep-deprived to realize this, but your child may save you some money on taxes this year.
Let's show you how new parents can save on their taxes, so you have the money you need for diapers and day care.
Claim Your Child For The Child Tax Credit
Once you have a kid (and your kid has a social security number), you’ll be able to claim your child on your taxes. This means that you’ll get to shelter up to $2,000 (per kid) from taxation. If you gave birth or adopted your child before midnight on December 31st, then they are probably a “qualifying child.”
To make sure you qualify to claim your kid, tax software like H&R Block will ask you a few quick questions to be sure your kid meets the IRS standards. They’ll also do the “behind the scenes” math to phase out the tax credit if you earn too much money ($200,000 for individuals or $400,00 for married filing jointly).
Get Extra Credits: EITC, Dependent Care, Adoption
Parents not only get to shelter more income from taxes, they often qualify for tax credits (that actually offset the amount you owe). These credits include the Earned Income Tax Credit (EITC), which is a credit for low to moderate income earners. A person (or couple) can claim up to $7,430 if they meet the income standards.
If your child is in daycare (while you and your spouse work full-time or attend school), you may be able to claim the non-refundable Dependent Care Tax Credit. You can claim up to $3,000 for one child or $6,000 for two or more kids. The exact amount you can take as a credit ranges from 20-35% depending on your income level. This is one credit where it definitely pays to have a great software doing the math for you.
An even more confusing credit for parents to claim is the Adoption Tax Credit. Whether you’re in the process of adopting, or your adoption finalized a few years ago, you may qualify for up to $15,950 in tax credits per child. Excess credits can be carried forward for up to five years.
Upgrade Your Status To Head Of Household
If you’re a single parent, and you qualify to claim your child, your personal status gets upgraded to head of household. This gives you the ability to shelter more of your income compared to a single filer.
Not sure if you qualify for head of household filing status? The IRS has a simple guide to help you figure it out.
Itemize With Ease
One opportunity for tax savings that a lot of parents miss is the opportunity to itemize medical and dental expenses. Of course, you can only deduct these expenses if you itemize your taxes, and you can only deduct expenses that exceed 7.5% of your adjusted gross income.
That being said, if you’re on a high deductible health plan or you’ve simply been unlucky, it’s worth trying to figure out if you qualify to deduct medical expenses.
When you have a child you can include any un-reimbursed expenses including:
Congratulations On Your Newest Addition (and Deduction)!
Becoming a parent turns your life upside down, and it can be a costly endeavor. However, at tax time, kids can be a welcome way to lower your bill.
If you'd having a hard time figuring out how to handle your taxes as a new family, check out our list of the best tax software. While a lot of options are free, it can make sense to pay for professional help when you have a major life event like the birth of a child.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared toward anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications, including the New York Times, Wall Street Journal, Washington Post, ABC, NBC, Today, and more. He is also a regular contributor to Forbes.
Editor: Clint Proctor Reviewed by: Colin Graves