A New Baby and Tax Breaks

Deductions and Credits

When a family has a new baby, their priorities are not taxes. Trying to figure out how to get more sleep – yes; taxes – no. But when it comes to tax time, it’s good for them to know that not only has the baby brought goodness into the world but also tax breaks!

We thought we would put together a list of what new parents need to know about taxes.

· Child’s Social Security Number (SSN)

o At the top of the list for tax breaks, be sure to get a social security number for your child prior to filing your return.  You must include your child’s SSN on your tax return in order to claim the child as a dependent and take any deductions or credits related to that child. For the steps in applying for your child’s SSN, see How to Get a Social Security Number.

o Tax return note:  when entering your child’s name on your tax return, be sure it matches exactly the name on the child’s SSN card. If you file electronically and the name doesn’t match the card, the IRS may make you go stand in line at the post office and mail your return.

· Exemption

o On a typical return, a child listed as a dependent, will reduce the family’s income by $3,500 for 2008. This is known as a dependency exemption.

o This $3,500 will start being reduced when your adjusted gross income (see Form 1040, page one, last line) is $239,950 or greater when filing married filing jointly.

o TurboTax will calculate the exemptions for your return.

· Day Care expenses

o If both you and your spouse work, your care expenses can reduce your tax to some degree. It’s the Credit for Child and Dependent Care Expenses. The credit is a percentage (20%-35%) of your child care expenses based (again) on your adjusted gross income.

o When you choose your child care providers, be sure that you write down their social security numbers (SSN) or employer identification numbers (EIN). In order to claim this credit, you will report their name, address, and identification number on Form 2441 with your tax return.

o If you pay someone to look after your child in your home, you may have to file Schedule H- Household Employment Taxes.  TurboTax will help you determine if you need to file this form and if so, how much the additional taxes will be. For further questions, see IRS Topic 756.

o If you receive dependent care benefits from your employer, or have any other questions about this credit, be sure to read IRS Tax Topic 602 .

· Child tax credit

o This is another credit that reduces your tax.  The most you can claim for this credit is $1,000 for each child and once more, if you have a high adjusted gross income (if married filing jointly, over $110,000), the credit starts being reduced.

o Yes, this credit lowers your tax but with the typical return, it can’t be more than your tax.  So if you have two children and your tax is $1,700, you will only get a credit for $1,700, not $2,000.

o There are exceptions to this rule and you may receive an additional child tax credit that is refundable over and above your tax. TurboTax will ask you the right questions and determine your total child tax credit.

o For more information, see IRS Publication 972.

· Earned Income credit

o Depending on the income that you and your spouse earned and the number of children listed on your tax return, you may be eligible for an earned income credit. The maximum amount of credit if you have one child is $2,917 and $4,824 if you have two or more children.

o If you’re filing married filed jointly, you won’t receive any credit if your earned income is much more than $41,000 and you have two or more children. If you have additional questions, see IRS Tax Topic 601

· Adoption expenses

o If you adopted your child, you might also receive a reduction in taxes for those adoption expenses, including lawyer fees and travel expenses, up to a maximum credit $11,650 for 2008. See IRS Tax Topic 607.

o Note: If filing married filing jointly and your adjusted gross income is more than $174,730, the credit will start being phased-out.

o Also check and see if your employer has an Adoption Assistance Plan that helps pay for some or all of your adoption expenses.

· Child’s investment income

o If your child has investment income, beware that if that investment income is greater than $900 in 2008, you may have to file a tax return for the child.

o If the child’s investment income is over $1,800, the income will be taxed at parents’ tax rate.  To save time filing that child’s return, you can elect to include that income on your tax return.

o For more information, see IRS Tax Topic 556





o The two best ways to save for your child’s college expenses are college savings plans and prepaid tuition plans. These programs are known as Section 529 plans and are established and maintained by states.

o Some states have both types and some have one type or the other but every state has at least one type.

o The prepaid tuition plans let you lock in the college’s current price to pay for your child’s future college expenses.  College savings plans don’t have this guarantee.

o Anyone, not just the parents, can contribute to these plans.

o There is no federal deduction when a contribution is made to a plan but you may get a deduction on your state return if you investment in your state’s 529 plan.

o The earnings on these plans are tax-deferred. You don’t pay taxes on the yearly earnings.

o If the money from the plan is used for the child’s college expenses, the distribution is tax free.

o If you start a 529 plan, be sure that you plan to leave the money in the plan until your child is ready for college. If you cancel the plan, you will have to pay tax on the earnings and a possible 10 % penalty.

o Here are some good websites for a better understanding of these college plans

Saving for College

College Savings Plan Network

Comments (5) Leave your comment

  1. You need to call the IRS. After an hour and 50 minutes on the phone with them and being transferred to four different people, they finally admitted that that letter went out in error and I was indeed entitled to the $300. They are intentionally giving people the run around to try and get them to give up and hang up and not have to pay. DON’T !!! Each person I talked to asked me all the same questions about my personal information and my return, told me they would need to put me on hold so they could “check into it” and that I “could be on hold for as long as 30-45 minutes” and here’s the telling question they’ll then ask: ” Do you still want me to look into this?” Everyone of them was hoping I would just give up and go away. The IRS knows there are thousands (maybe tens of thousands) of people that qualify for the extra $300 but they figure it’s in their best interest to deny Line 70 and wait and see who will have the tenacity to fight them for it.
    Fight them and don’t give them the satisfaction of screwing the American taxpayer out of what they rightfully deserve under their own tax code laws. This is all a big game to them because they know they can’t be sued for their denying the initial return.
    It pains me to see other Americans assisting the federal government in screwing over other Americans. Don’t give up. You are entitled to that $300. Stay on the phone, make a log with the dates, times, and get names, departments, and ID numbers of every person you talk to. DONT” let them try and weasel out of it. DON’T !!!

  2. I have also received the same letter from IRS that we can’t get $300 for our baby born in 2008. If IRS is correct then TurboTax must be wrong. Anyone can help?

  3. Turbo Tax said I qualified for an additional $300 because we had a child that was born in 2008 (1040 Line 70), but I received my rebate check today for $300 less than I was supposed to get along with a letter stating “There was an error on your 2008 Federal Income Tax Return” and they changed the amount of the recovery rebate credit I claimed on line 70 because the amount entered was computed incorrectly. Everything I’ve read says we should have received an additional $300 in our refund, but the IRS rejected it. Someones not telling the truth. Which one isn’t? Turbo Tax or the Feds?

  4. Hi Stephenie, Go to Turbotax http://turbotax.intuit.com/ and let it walk you through the return. Start with the Free Edition. For most simple returns, you won’t have to upgrade to a different version.
    If you haven’t lived with your spouse for the last 6 months of 2008 and you provide more than half the cost of your home, and their is no legal separation decree that says your spouse can take the child as a dependent, then you can file as head of household and take the child as your dependent. Whoa! That was a long sentence. So get going. Depending on your income you may qualify for earned income credit. Also you can get a credit for your child care expenses.

  5. I had a baby last year. This is my first time filing taxes alone. I don’t know how to do it. I am married but have been seperated for over a year. Please help me. Stephenie

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