Whether your child is a newborn or a teenager almost ready to head off to college, children have an impact on your taxes. Here are some of the things you should know.
Get That Number
You probably were given a form to request a social security number for your newborn before you left the hospital. Having a newborn can be a busy, overwhelming time, but don’t let that stop you from applying for a social security number. You’ll need your child’s social security number to claim him or her on your tax return.
Child Tax Credit
The dependency exemption was eliminated under the new tax law, but if you can claim your child as a dependent you can claim the Child Tax Credit and other tax benefits as well. The Child Tax Credit will reduce the taxes you owe by $2,000 for each dependent child you claim who is under the age of 17 at the end of the year. The credit phases out if your income is over $400,000 ($200,000 if single).
Earned Income Tax Credit
This is a huge credit for parents with dependent kids, which can be a credit up to $6,431 in 2018 ($6,557 in 2019) if you have three or more kids. Generally speaking, you are eligible for the EITC if you meet certain income limits and all of the following apply:
- You are a U.S. citizen
- You are over the age of 25 or have qualifying children
- You do not file “married filing separately”
- You have earned income from employment. Unemployment income doesn’t count
- You can qualify if you have income from a home business or provide services
While you can have interest, dividends, and other investment earnings, you cannot have more than $3,500 in 2018 ($3,600 in 2019). Most importantly, you have to file your federal taxes in order to claim this valuable credit.
Child and Dependent Care Credit
Not to be confused with the Child Tax Credit, the Child and Dependent Care Credit helps people who pay for child care to allow them to work. The credit you receive will range from $600 to $1,050 if your childcare is for one child, and double that if caring for two or more children. The credit depends on your income and the cost of your child care, up to $3,000 for one child and $6,000 for two or more children.
Dependent Care FSAs
If your employer offers a dependent care FSA, you can contribute up to $5,000 before tax directly from your paycheck to the account. The money going into your account is not taxed, so that’s like getting a tax deduction for the cost of childcare.
If you adopted your baby, a special adoption credit of up to $14,080 in 2019 ($13,810 in 2018) will be a big benefit in offsetting the costs of the adoption.
Under previous tax law, the benefits of 529 plans were limited to a college education only. However, the new law expands its use. Parents can now use the 529 plan to pay for their children’s education at private elementary and high schools.
If you save for your children’s education through tax-advantaged 529 plans, your contributions won’t be tax deductible, but you’ll never pay tax on the earnings if the funds are used for education. So don’t delay, the earlier you start contributing, the longer the funds will have to grow tax-free. Additionally, low to middle-income parents can contribute up to $2000 a year into a Coverdell Education Savings Account and reap tax-free earnings, similar to 529 plans.
Don’t worry about knowing these tax rules. TurboTax will ask simple questions and give you the tax deductions and credits you’re eligible for based on your entries. If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered. TurboTax Live CPAs and Enrolled Agents are available in English and Spanish and can review, sign, and file your tax return.