Welcoming a new baby into your family is a huge occasion. This event thankfully comes with several tax benefits that can help with the cost of raising a family.
First, however, plan to register your newborn for a social security number. It’s required for claiming your child as a dependent and accessing these tax benefits.
With that out of the way, here are some 2021 benefits for parents to think about:
Child Tax Credit | Credit for Other Dependents | Additional Child Tax Credit – Potentially refundable credits that can significantly reduce your tax bill or even generate a refund. Amount depends on qualifying children and your income level.
Earned Income Credit – A refundable credit that reduces the federal tax you owe by $1,502 to $6,728. Meant for lower income filers, and depends on tax filing status, income level, and qualifying children.
Child Care Credit – A refundable credit if you pay for childcare to allow you to work. The credit amount depends on qualifying children, your income, and actual childcare expenses.
Adoption Credit – a large credit subject to qualifying expenses and income limit phase outs. It is nonrefundable, however unused portions can be carried over up to five years.
Section 529 Education Savings Plan – Allows for nondeductible contributions and earnings grow tax free. Withdrawals are tax free if funds are used for qualified education expenses.
That’s good news, but there are a few gotchas:
Kiddie Tax – Investment income above $2,200 earned by a dependent child is taxed at the parents’ marginal tax rate. Covers children up to the year they turn 19, or 24 if a dependent and full-time student.
Nanny Tax – You may be considered the employer, and responsible for paying payroll taxes, if you pay more than $2,300 to someone to provide childcare in your home.
In practice, the rules for all the above are complex. Before a life event occurs, ask your tax accountant for help to evaluate how these situations apply to you.