New parents have lots of new things to think about — from what kind of formula to feed their baby to what kind of car seat to buy. One thing that probably isn’t high on a new parent’s priority list is tax planning.
But maybe it should be. Having a child can impact your taxes in a number of different ways. Here are a few things to think about when it comes to the tax impact of having a child.
Filing Status, Exemptions and Withholding
Your filing status won’t be affected by having a kid if you’re married, but if you’re single, you could save on taxes by switching from single to head of household. This would increase your standard deduction and place you in a more advantageous tax bracket. To qualify, you must pay more than half the cost of maintaining the child’s household.
You can also claim your child as a dependent on your tax return, which will reduce your taxable income by $4,050 in tax year 2017. This will result in a tax savings of over $1,400 if you’re in the 35 percent tax bracket. You will receive the full value of this tax break regardless of when your child was born — whether on January 1 or December 31.
Meanwhile, don’t forget to adjust your tax withholding at work, since the dependency exemption and child tax credit (see below) may reduce the amount of tax you owe. To do so, file a new Form W-4 with your employer and claim an additional withholding allowance. Tax software programs can help you determine the correct withholding amount.
Child Tax Credits
The government makes several generous tax credits available to new parents, including the following:
- Child Tax Credit — You can claim this credit of $1,000 per child each year until your child turns 17 years old. Note that the credit phases out at certain adjusted gross income levels: $75,000 for singles and heads of household and $110,000 for married couples filing jointly in 2017.
- Child and Dependent Care Credit — This credit of up to 35 percent of the first $3,000 you pay in child care expenses may be available to you if you pay for child care while you work.
- Adoption Credit — If you adopt a child, you may be able to claim a credit of up to $13,570 in 2017 to help offset your adoption expenses. Note that the adoption credit phases out and is eventually eliminated at certain adjusted gross income levels.
Tax-wise Saving Strategies with Kids
Having a child may change your saving priorities. For example, you might want to get a head start in putting away money for your child’s college education.
One way to do this and save taxes at the same time is to start a Section 529 college savings plan for your child. Earnings within a 529 plan accumulate tax-free and you can also withdraw the money tax-free if it’s used to pay for qualified education expenses. Section 529 plans are established by states, but your child can use the money saved in a 529 plan to pay for educational costs at colleges located in any state.
When your child is a little bit older, he or she can get a jumpstart on tax-wise retirement saving by opening a Roth IRA for kids. While it might seem like childhood is a little too early to start saving for retirement, the reality is that it’s really never too early to think about retirement savings.
Once your child is earning income — for example, by babysitting or working at a fast-food restaurant — a Roth IRA can be opened in his or her name. Your child can withdraw the money tax-free in retirement — or in some situations, to buy a first home or help meet education expenses.
Obtain a Social Security Card
One more thing: You should apply for a Social Security number and card for your child right away — preferably, before you even leave the hospital. Your child will need to have a Social Security number in order for you to claim him or her as a dependent on your tax return and receive the child tax credit.
Please contact us if you have more questions about tax planning strategies for new parents.