Welcoming a new child into a family, can be very exciting, fulfilling, and rewarding but also very expensive. There are the hospital bills, babys room, clothes and diapers, special food, surrogate or birth mother expenses, travel, and possible loss of income of a stay-at-home parent. The Tax Code, however, tries to be family friendly in a number of ways.
In addition to raising revenue to support our government, many dont realize that the Tax Code is also structured to promote a number of social goals deemed worthy of encouragement, including helping families, said Mark Luscombe, JD, LLM, CPA and Principal Federal Tax Analyst for Wolters Kluwer Tax & Accounting. A number of Tax Code provisions are designed to make finances a little easier for new parents, with a few adjustments made by the Tax Cuts and Jobs Act.
Top Tax Tips for New Parents
- A New Child Can Qualify Parents for a Number of Tax Breaks
- The Child Tax Credit, now up to $2,000
- The Child and Dependent Care Credit, up to $1,050 for one child; employer may also offer a tax-favored child care reimbursement account
- The Earned Income Tax Credit, with the maximum credit increasing from $529 with no qualifying children to $3,526 with one qualifying child for 2019
- The Adoption Credit, up to a maximum of $14,080 for qualifying adoption expenses for 2019; employer may also offer tax-favored adoption assistance program
- Code Sec. 529 Education Savings Plans, no deduction or credit, except possibly for state income taxes, but significant contributions, tax-free accumulation of earnings, and no income limits
- Coverdell Education Savings Accounts, up to $2,000 per year in non-deductible contributions and tax-free distributions for elementary and secondary education
- Medical expense deduction, possible additional itemized deduction for medical expenses of birth and child care if itemize deductions and total medical expenses exceed 10 percent of adjusted gross income
- Filing Status: A new child may change the filing status of a single parent from a single filer to a head of household filer
- A Few Things to Watch
- Social Security number, obtain a Social Security number for the child as soon as possible for all of the tax benefits
- Qualifying Child, meet residency and support tests, especially an issue with divorced or separated parents
- The Kiddie Tax, can tax unearned income of the child at very high estate and gift tax rates
- The Nanny Tax, requires proper tax treatment of anyone hired to care for the new child, including reporting wages and withholding Social Security and Medicare taxes
- Proposed Legislation Legislation currently under consideration in Congress would permit penalty-free withdrawals from IRAs for child birth and adoption expenses.
With all of the other things new parents have to worry about with the arrival of a new child, worrying about taking maximum advantage of the tax benefits can bring additional rewards.
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