Finance Blog

Tax Tips: Tax Implications of a New Baby

Written by Eva Rosenberg on November 14, 2011 in Tax  |   1 comment

Babies bring us happiness—and tax benefits. I have a number of tax tips that will help you figure out the tax benefit you’re entitled to with a new baby. It’s just a little added bonus to your bundle of joy. Tax Tips: What are some…

Babies bring us happiness—and tax benefits. I have a number of tax tips that will help you figure out the tax benefit you’re entitled to with a new baby. It’s just a little added bonus to your bundle of joy.

Tax Tips: What are some tax benefits for parents?

The dependency exemption is worth $3,700 per child in 2011. Even if your baby is born on December 31, 2011, you will still get the exemption for the whole year.

What if you are a single parent and this is your first child? In that case, you are entitled to use the head of household (HOH) filing status. You receive a higher standard deduction ($8,500) than a single person ($5,800). As HOH, your tax rates are also lower than a single person’s. Your 15 percent tax bracket is good up to $46,250 instead of $34,500 (single).

Tax Tips: New baby expenses you can and cannot deduct

Medical expenses are common: prenatal care for mom; pediatric care after the baby is born; prescriptions before, during, and after the birth, and the stuff in between, including the birthing expenses. Your insurance will pick up most of those costs, if you have coverage. To use the itemized deductions, your out-of-pocket medical expenses must exceed 7.5 percent of your adjusted gross income (the bottom line on page one of your Form 1040).

After a baby’s birth, donations to houses of worship are common. There also may be a benediction, a christening, a bris, or another special ceremony. However, these special services are considered personal expenses. There is no charitable contribution for these costs, whether paid to your house of worship or to someone providing religious services.

Tax Tips: Further examples of tax credits for parents

Here are two examples of federal tax credits that a new parent may be able to claim:

The Child and Dependent Care Credit is filed on Form 2441. It’s worth 20 percent to 35 percent of the first $3,000 (up to $6,000) per child paid for childcare so that the parent(s) can work or study. Both parents must have income during the year to be able to use it. If one or both parents are full-time students or totally disabled for any month, you can allocate $250.00 worth of income to that month. Since this is a non-refundable credit, it can only be used to wipe out your tax liability. If your taxes are lower than the credit, you lose the benefit of the difference.

You also get a child tax credit (or additional child tax credit) worth up to $1,000 per child. If your income is particularly low (married, jointly, under $41,132 with one child), you may also be entitled to an Earned Income Credit (EIC) of over $3,000. With two more children and an income under $46,044, your EIC may be more than $5,000.

Aside from federal tax benefits, your state may also have a variety of tax credits or benefits for you. Be sure to learn what they are.

Don’t expect the tax benefits to cover the cost of supporting your new child. However, between federal and state tax benefits, you’re going to get substantial benefits to defray the costs of parenthood.

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Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

1 comment

  1. Credit Sesame says:

    What a great starting point for the discussion of new babies and taxes! The tips on “what you can and can’t deduct” are really great. Sharing with our Twitter followers now.

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