Your life changes dramatically when you have a baby. Your taxes change too.
I know. After becoming a mother or a father, the last thing on your mind is taxes. You are thinking about waking up in the middle of the night and whether your relatives have washed their hands before handling the baby. I’m sure the price of diapers would be a higher priority for your finances.
It may be far down on your list, but having children has an immediate impact on your taxes thanks to several deductions that will now be available to you. Below are the most common.
So long as they live under your roof, (or the roof of a college institution), you get to claim an extra personal deduction on your 1040. That’s a whopping $3,900 off the top of your reported income. For a married couple in the 15 percent tax bracket, that’s $585 back from Uncle Sam, and all you need to do is add your child’s name to the dependent line on your tax form.
Child Tax Credit
An added personal deduction is just the tip of the deduction iceberg. The biggest tax savings comes from the Child Tax credit. Middle class families get to take a $1,000 credit for each child, up to three children. As a credit, the savings from this deduction is subtracted off the amount of tax you owe instead of your reported income. That means your tax bill just got $1,000 lighter just by giving birth.
529 Plan College Savings Deductions
While the personal deduction and child tax credit require little more than possession of a child, the remaining deductions are more restrictive. However, that doesn’t mean they are uncommon.
If you want to save money for your newborn’s future college education, you should consider a state 529 plan. Most states with a state income tax offer tax deductions for contributions made to your children’s plans. You need to be careful to spend the money for college. Unqualified withdrawals come with taxes and penalties down the road.
Itemize Your Hospital Bills
It’s expensive to have a baby in the hospital. I hope that you have good insurance and did not need to spend thousands of dollars to deliver your child. There are many people who end up with large medical bills after discharging from the hospital. If you paid large sums of money out of pocket, your bills might be tax deductible.
So long as you itemize your deductions and your medical expenses exceed 7.5 percent of your adjusted gross income, you can deduct a portion of your hospital bills. Obviously, this won’t seem like a great benefit in light of the bills you’ll be receiving, but it certainly softens the shock on your finances to a small degree.
These are just a few of the most common deductions that can be realized now that you are a parent. A few other deductions worth looking into are the child care credit and earned income tax credit, both of which might now apply to your new family.
With that: congratulations, now go lower your tax bill.