Bringing a new member to the family brings about many changes, meaning your taxes can be affected. As a parent, you automatically qualify for many tax credits. As a first-time parent, you may have been aware of this, but there is much more that can apply to your return depending on your family situation. We discuss some important things to know and pitfalls to avoid when filing your taxes.
Take Advantage of the Federal Child Tax Credit
One of the biggest mistakes that first-time parents make when filing their taxes is not looking into all the tax benefits that they can apply to their returns. Families usually deduct up to two thousand from their income taxes for children under seventeen. If you have brought a new member into the family, you can start claiming this benefit the next time you file your taxes.
In addition to the child credit, parents often make the mistake of not claiming how much they spent on child care expenses. Utilizing a daycare center for your children qualifies for the dependent care credit when filing. Parents may be eligible for up to 35% of out-of-pocket costs out of $3,000 for one child. Parents may also be eligible for 35% out of $6,000 for two or more children.
Consider What Your Status Will Be When Filing
How you classify yourself when filing your tax return can greatly affect how much you will get deducted from your tax bill. If you are a single parent, you can file as head of household, which provides a bigger standard deduction than for a single parent that is not filing with children. If you are married and filing jointly, having a child will not affect your status.
Be Mindful of How You Hire a Caregiver
If you have a caregiver or a “nanny” you may have to pay the “Nanny Tax” when filing your tax return. This is because the IRS may view you as an employer, so you may need to file the appropriate paperwork and additional taxes. This could also apply to babysitters if they are routinely watching your children.
You Could Possibly Get a Tax break on Medical Expenses
The minute you take your baby home with you is the time you should take to gather your medical bills. You can get a tax break on these expenses only if you itemize your return. You can deduct the total out-of-pocket costs of qualified medical expenses for the year that exceed 7.5% of your income, which is usually the case when a baby comes into the picture.
Consider Opening a 529 Plan
A 529 plan is an investment account that offers tax benefits when used to pay for qualified education expenses. If you have room in your budget to do so, setting up a 529 plan for your college savings is a good idea. To keep a 529 routinely growing, parents are recommended to add up to $500 every month. You will be amazed at how much the account will grow by the time your child enrolls for a college education!
Adoptions Count as Credit, Also
You can get a credit for welcoming a family member via adoption, as well. You can receive a tax credit for all qualifying adoption expenses up to $14,080. These expenses are to include adoption fees, court costs, and travel expenses. You don’t need to itemize in order to take advantage of the adoption credit either.
Don’t Forget to Update Your W-4
Immediately changing your W-4 does not affect your taxes for the year, but it is still worth working on for the next year while you have the time to prepare. On this form, you can claim allowances, including those for kids, which could bring down the amount of income that is withheld out of your every paycheck.
Other Tax Breaks Parents May Qualify For
Parents could also qualify for other tax breaks including the Earned Income Tax Credit and gifts (provided as money or property) given by friends, grandparents, and other relatives. These gifts or assets are income tax-free to both you and your child.
Get the Most Out of Your Tax Return with Our Help
If you are filing as a first-time parent, the professionals at Clifford, Ross, Raudenbush, and Cooper can take a look at your situation and ensure that you do not miss out on any tax breaks. Contact us today to make an appointment to have your taxes filed in time.