Becoming a parent for the first time, whether you’re adopting or you’re pregnant, is exciting and a little bit scary. There are several tax implications associated with adding a new member of your family. We’ve broken them down here, so you have one less thing to worry about while anticipating your new arrival.
Add your new child as a dependent on your tax return
When reviewing your personal information on your tax return, make sure to claim your new dependent for tax purposes. This will help you qualify for additional credits and deductions. To learn more, read Who Can I Claim as a Dependent?
Learn about new credits and deductions
Child Tax Credit
A new baby means you automatically qualify for a partially refundable Child Tax Credit of $2,000. This includes any babies you may have had during the tax year, even if they were born on December 31st. This credit will reduce what you owe, or up to $1,400 can be added to your refund if you don’t owe. However, it will phase out for higher income levels. For example, if you are a married couple filing jointly and make over $400,000 or a single filer who makes over $200,000, you will not be eligible for the credit.
The American Rescue Plan expanded the Child Tax Credit for 2021. For more information, read Everything You Need to Know About the 2021 Child Tax Credit.
Earned Income Tax Credit
The Earned Income Tax Credit aims to assist lower to middle-income families. Like the child tax credit, this credit will reduce what you owe. If you expect a refund, this credit is fully refundable and will add to your refund. Look at the table below to see if you qualify.
|Dependents claimed||AGI for married filing jointly||AGI for single or head of household|
|3 or more children||$57,414||$51,464|
Child and Dependent Care Credit
If you’re a parent who works and pays for child care, you may qualify for the Child and Dependent Care Credit. If you pay for one child under age 13, you can receive between $600 and $1,050. If you’re paying for two or more children under 13, you can receive between $1,200 and $2,100. The amount of the credit depends on your income and how much you pay for the care.
Lower-income workers with an adjusted gross income of $15,000 or less can claim a credit worth up to 35 percent of qualifying costs.
There’s also a tax credit to help offset the significant cost of adopting a child. For 2021, the credit is worth as much as $14,440. It is important to note that this credit is not refundable, but it can be carried over to the next 5 tax returns. The credit begins to phase out for taxpayers with an income of $214,520 and is eliminated if your income is $254,520.
Update your W-4 withholdings
When you start your job, you are required to fill out Form W-4 to calculate your withholdings. However, having a baby can change your withholdings because you gain a new dependent for tax purposes. Therefore, you should update this form with your employer after you have your new baby.
Update your filing status
If your filing status is single when you have your baby, you might qualify to update your status to head of household. If you update your status, it may allow you to take a more significant standard deduction.
If you are married filing jointly or single, having a baby will not change your filing status.
Start saving for college tax-free
You may think that college is a lifetime away when you are holding your newborn. But college is a significant expense, and the time will come faster than you think. The good news is you can start saving for your child’s tuition and fees as soon as they are born. And you can do it tax-free. One option is a 529 Savings Plan. Contributions made to this plan are not deductible, but the earnings will grow tax-free. Payouts are also tax-free if the money goes towards qualifying college bills.
The information in this article is up to date through tax year 2021 (taxes filed in 2022).