As a non-parent at this point in my life, it's easy to break things down to the basics of logical and rational thinking - or is that just typical man-thinking? Either way you pigeon hole me, here's my take on the tax break for babies situation: from a tax perspective, kids seem like a great idea... but is it worth all the dirty diapers? Or those crazy teenage years?
Raising kids is expensive and is obviously a major change in your life. Luckily, our fair representatives with legislative authority have passed many tax breaks to help American families. They will tax you at the tanning salon and increase the capital gains tax but hey, you can get another $1000 credit on your taxes for having another child!
The following is a summary of the important tax credits and requirements when you have a baby:
Identification for your kid! (aka Social Security number). Your key to tax benefits is a Social Security number. You'll need one for your child to claim him or her as a dependent on your tax return. If you do not include a ssn on a tax return and attempt to electronically file the return, it will be rejected - if you paper file with no taxpayer identification for your kid it will tie up your refund for much longer than you'd like!
You can request a Social Security card for your newborn at the hospital at the same time you apply for a birth certificate. If you don't, you'll need to file a Form SS-5 with the Social Security Administration and provide proof of the child's age, identity and U.S. citizenship.
Dependency exemption. Claiming your son or daughter as a dependent will reduce your taxable income by $3,650. In 2010, this will save you approximately $913 if you're in the 25% bracket. The sweet part is you get the deduction no matter when the child is born during the year... even if it's 11:55pm on December 31st!
Child Tax Credit. New babies also yield a $1,000 child tax credit, and this is a bonus that reduces your actual tax owed by $1000. This little extra treat can be claimed every year until the year they turn 17.
Unlike a deduction that reduces the amount of income the government gets to tax, a credit reduces your tax bill dollar for dollar. So, the $1,000 child credit will reduce your tax bill by $1,000. The credit is phased out at higher income levels, beginning to disappear as income rises above $110,000 on joint returns and above $75,000 on single and head of household returns. For some lower-income taxpayers, the credit is "refundable" which means if the credit exceeds tax liability for the year, the IRS will issue a refund check for the difference.
Filing status. Single people...step on up - you are now Head of Household which means a larger standard deduction. If you are married, having a child will not affect your filing status. The only catch with head of household is that you must pay more than half the cost of providing a home for your new son or daughter.
Earned income credit. This is another big "refundable" credit - the amount you qualify for is based on the number of kids you have and your earned income for the year. The credit maxes out at $5,666 with three or more qualifying children. Preview the 2010 EITC Income Limits and the credit ranges.
Child care credit. If you pay for child care to allow you to work, you can earn a credit worth between $600 and $1,050 for one child under 13 years old or between $1,200 and $2,100 if you're paying for the care of two or more children under 13. There are some additional rules and limits but you get the drift... one major catch with this credit is that you are paying a family member or friend to watch your children, you will need their social security number to claim the credit - and they will need to report your payments as income!
Kiddie Tax. Children who are under age 18 at the end of the year will continue to be taxed at the parent’s tax rate. This taxing of investment income at the parent’s tax rate will also apply to a child aged 18 at the end of the year or to a child who was a full-time student, over age 18 and under age 24 at the end of the year, when the child did not have earned income that was more than half of the child’s support. If the child’s interest, dividends, and other investment income total more then $1,900, part of that income may be taxed at the parent’s tax rate instead of at the child’s tax rate. Liberty Tax Outlines the Latest Tax Circumstances That Pertain to Children and Families for Filing a 2009 Tax Return.
Disclaimer: Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.