Did you have a baby? Congratulations! You have an exciting time ahead of you. You also have a new partner to help you along. Uncle Sam. Yes, along with the new bundle of joy comes some tax benefits you should know about.
Before you can get any of the tax breaks that you deserve, make sure your child has his or her own social security number. Now, when you file your tax return, you have an additional exemption to claim.
In 2011, an exemption represents a deduction against your income of $3,700 and in 2012 the exemption will increase to $3,800. Not to be confused with tax credits which are a dollar for dollar savings for you, these deductions simply reduce the final tally for your taxable income. In the 15% bracket this will save you $555, and at 25%, $925 in 2011, you get the idea.
If you adopted a child, you are eligible for The Adoption Tax Credit, up to $13,360 for 2011 to offset your out of pocket costs . The credit begins to phase out for couples with a Modified Adjusted Gross Income (MAGI) over $185,210 and is completely eliminated at a MAGI of $225,210 for 2011.
The Child Tax Credit is an additional $1,000 credit you may be eligible for if you have a child under 17. It’s available to couples whose MAGI is under $110,000 or $75,000 for a single parent, and phased out above these levels.
If you pay someone to take care of your child under the age of 13, while you are working or actively seeking work, you may qualify for a Child and Dependent Care Tax credit up to $1,050. Families that earn less than $15,000 can claim a credit for 35% of qualifying expenses up to 3,000 for one child and up to $6,000 for two or more children. If your earned income is more than $43,000 you are still are allowed 20% of eligible costs.
If you are in the 25% bracket or higher, instead of the credit, it may make sense to use a Dependent Care Account (DCA) if your employer offers it. You may deduct up to $5000 pretax and apply for reimbursement of expenses for your child under the age of 13 (or older child incapable of caring for his or her self.) Important to note, even though the enrollment period is usually once a year, around November, the change in family status (i.e. having the new child) enables a during-the-year change request.
The Flexible Spending Account (FSA) is another opportunity to withhold pretax money. The typical limit offered by most companies is $5,000 per year. Similar to the DCA, this account is used to cover medical expenses, co-pays, prescription medicine, glasses, or other medical procedures not reimbursed by your insurance. While you may have one with or without a child, the hospital bills for a child birth add up, and this is a great way to cut your tax bill a bit further. This account is “use it or lose it,” so plan carefully. If December approaches and you realize there’s extra money, it’s time for new glasses. Non-prescription medicine is no longer eligible, although you can certainly ask your doctor to write one for aspirin, cough medicine, etc, during a regular visit.
By the way, just when you can’t remember what it was like to sleep through the night, your child will be a teenager and sleep till noon every chance he gets.