5 Ways Newborns Lower Your Tax Bill

The best baby shower gift might come from Uncle Sam. Newborns do cost a considerable amount of money, but they also give you a pay raise by lowering your tax bill.

I’m celebrating the birth of my son by filling out a new W-4 form with my employer. With another dependent in the family, my tax bill is going to decrease by roughly $1,500, I should be taking home an additional $110 per month. All I need to do is reduce my withholding with my employer.

Although not exhaustive (for example, you might be able to deduct hospital expenses if paid out of pocket), here are the most common tax deductions families receive after having a newborn.

Additional Personal Exemption

You can claim a $3,700 personal exemption for each child ($3,700 is an estimate. $3,650 was 2010’s). However, you must be able to claim your child as a dependent; newborns easily qualify. Although $3,700 sounds impressive, this exemption doesn’t directly reduce your tax owed. It reduces your adjusted gross income. Assuming you are in the second tax bracket, 15%, an newborn would reduce your tax bill by and estimated $550.

Child Tax Credit

So long as your modified adjusted gross income does not exceed $110,000 for those married filing jointly, you can claim a $1,000 child tax credit for your newborn. Tax credits are the most coveted deduction. A credit directly reduces the amount of taxes you owe. If you owed $1,000 before giving birth to your bundle of joy, the credit would lower your bill to $0.

Child & Dependent Care Expense Credit

Sending your child to day care? You may be able to take a credit for up to 35% of your expenses.

The child & dependent care expense credit was established to help defray some of the enormous expenses associated with day care. However, there are a number of rules and restrictions.

If you are filing jointly, you and your spouse must earn income. The act of sending a child to day care, must be for the purpose of earning income or attending college full time. Your tax credit is reduced by any tax exclusions or deductions from using a dependent care benefit plan. The maximum credit that can be claimed is $3,000. The percentage expenses used to determine the credit vary depending on your income.

P.S. – Summer Camp counts!

State 529 Plans

Planning on sending the little tike to college?

State college savings plans, also known as 529 plans, offer state income tax benefits for contributions. Contributions to the NYS 529 are deductible up to $10,000 on state income taxes. CO is even better; you can deduct up to $280,000. All proceeds avoid Federal Income taxes.

You want to do some careful planning. There are penalties if you don’t use the funds for college. But, you do not need to go to a state school to avoid penalties or obtain tax benefits.

Earned Income Tax Credit

The earned income tax credit is for low income tax filers and at first blush, it doesn’t seem to be related to having children. In fact, to qualify for the credit, you don’t need to have a child. However, the income threshold more than doubles once you have your first child.

To qualify EITC, parents with no children could not have income exceeding $18,470. For parents with one child, the threshold jumps to $40,545. The amount of the credit is also much larger; increase from $457 to $3,050.

Your new child will bring you an immeasurable amount of joy. Perhaps, this year your tax bill will as well.

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