Stretch marks and sleepless nights? Check! Excessive baby pictures that have overwhelmed your Instagram feed? Check! The sudden urge to talk about your adorable little one every chance you get? Double Check! Welcome to the exhilarating ride that is parenthood! While you’re busy juggling diapers, midnight feeds and a whole lot of baby joy, here’s one thing you might’ve brushed under the crib – your taxes! But, don’t let the scary ‘T’ word daunt you. We’ve got you covered! Let’s make this seemingly boring (and daunting) task of understanding tax changes as a new parent easy—and dare I say fun…okay, bearable!
Tax: To Exempt Or Not To Exempt:
Once upon a time, every new baby brought with them an extra tax deduction. Unfortunately, that sunny period ended after 2017 when the Tax Cuts and Jobs Act stepped in. The swaddled tax deductions were replaced with a larger standard deduction. It’s not all sour milk though! With the arrival of your tiny miracle, there’s a host of other tax benefits that you might benefit from! Pretty exciting, right?
Change of Status, Filing-Wise:
Dear single parent, your little bundle of joy might just help you transition to a Head of Household filing status, bringing along a bigger standard deduction. How much bigger are we talking? Here’s a snapshot:
Standard Deductions for 2023 and 2024:
Single and married filing separately? Expect $13,850 in 2023 and $14,600 in 2024. As a Head of Household, the deduction increases to $20,800 in 2023 and $21,900 in 2024. If you’re married and filing jointly, it’s even higher at $27,700 for 2023 and $29,200 for 2024! Isn’t that simply fantastic?
Across the baby battlefield of diapers and feeding, co-parenting could lead to a small hiccup. Only one parent can claim the baby as a dependent. Unmarried? Only one parent can claim the Head of Household status. Lucky for you, the IRS already has some tiebreaker rules to help sort such matters! Unfortunately, my friend, if you’re married, having a baby does not change your filing status at all.
Knock Knock, Do Tax Credits Arrive with That Stork?
Absolutely! Your adorable addition helps you qualify for a variety of tax credits! Unlike tax deductions, these special gifts reduce your tax bills, dollar for dollar, making them extraordinarily valuable. Remember, they might be refundable or non-refundable, meaning if your credit is larger than your tax bill, you could receive part of your credit as a refund!
Child Tax Credit
This is specifically for all you folks who have just hopped onto the parenthood bandwagon. The child tax credit offers up to $2,000 in federal tax credits for each qualifying child you claim on your tax return. Watch out for the threshold though! To qualify for the full $2,000 credit, you need an annual income of $200,000 or less ($400,000 if married filing jointly).
Adoption Credit
Child and Dependent Care Credit
Do you require care costs to work, look for a job or attend school? If so, you’re in luck! In 2023, this credit allows you to claim 20% to 30% of up to $3,000 in qualifying expenses for one dependent or up to $6,000 for two or more dependents.
Earned Income Tax Credit
The more, the merrier, right? Especially, when it comes to your household size, as it can get you to qualify for the Earned Income Tax Credit or perhaps increase the amount you claim. Trust me, this is great news for our friends in the low-to-moderate-income group!
Four Steps To Claiming New Parent Tax Breaks
Feeling a bit overwhelmed with all this tax talk? Don’t worry! We’ve boiled it down to four simple steps to prepare for your first tax season as a new family:
1. Get a Social Security Number
The very first thing to do is to sort a social security number for your baby. You can simply apply when submitting your baby’s birth certificate paperwork. Your baby’s social security number is crucial for claiming your baby as a dependent on your tax return.
2. Think about Tax-Advantaged Savings
If you have been blessed with monetary gifts for your baby and are clueless about where to save it, consider opening a 529 education account that will help you save for your baby’s college expenses. With this account, there’s no tax on interest and gains as the account grows. Sounds almost too good to be true, doesn’t it?
3. Keep Track of Your Deductible Expenses
Remember to document your qualifying expenses if you open a Flexible Spending Account through your employer or if you plan to claim the child and dependent care credit.
4. Adjust Your Tax Withholding
Your baby not just changes your life but can dramatically reshape your taxes as well. Consider tweaking your withholding when your baby arrives to mirror your new tax reality. Once you’ve filled out your tax return, reassess your withholding to suit your annual tax liability.
Wrapping it up!
Adjusting to life with a new baby is both exciting and overwhelming: While dealing with diaper duties and sleep schedules, the last thing you need is tax-stress. By focusing on the aforementioned essential points, you can ensure you’re not missing out on key tax benefits. Remember, there’s always help at hand. If you feel you need some extra assistance navigating your taxes, consider working with a tax advisor.
Good luck navigating through the beautiful, bewildering journey of parenthood, and remember, when it comes to taxes, you’ve got this!
