If you’re a parent, there’s nothing more important to you than your child (I know this; I’m a mom). Is there anything you wouldn’t do for them? Any sacrifice you wouldn’t make to ensure their wellbeing?
Believe it or not, this is something that you and the IRS agree on. The tax code provides certain benefits for households with children, and if you’re a new parent, it’s important to understand these “perks of parenthood,” especially at tax time—which is upon us, right? So take note of these important tax tips, aimed specifically at parents.
- The last day of the year counts for the whole year. Even if your baby was born at 11:59 p.m. on December 31, as far as the IRS is concerned, you had a baby for the whole year. But in order to claim your child as a dependent on your tax return—and to receive the other benefits listed below—you’ll need to apply for a Social Security number for your child. If you deliver in a hospital, applying is part of the standard paperwork. But if you had a home birth or used a birthing center, you may need to obtain a Form SS-5 to apply.
- Know the tax credits your child entitles you to. Adding a child to your family may qualify you for the earned income tax credit (EITC). You may also qualify for a child tax credit, depending on your adjusted gross income (AGI). The child tax credit for 2020 is $2,000 per qualifying child, but the new stimulus bill (the American Rescue Plan of 2021) raises the child tax credit for 2021 to $3,000 per child ($3,600 per child under the age of 6) for families with qualifying income (generally, an AGI of $75,000 or less for single filers, $150,000 or less for married couples filing jointly). Finally, you may qualify for the child and dependent care credit, based on qualifying expenses for providing care for your child in order for you or your spouse to be able to work. For all of these, the key word to keep in mind is “credit”: these provide a dollar-for-dollar reduction in any taxes you would otherwise owe. So, for example, if you owe $3,000 in taxes, but you qualify for a $2,000 child tax credit, your tax bill immediately goes down to $1,000.
- Check your withholding allowances. Adding a child—and thus, a dependent—may allow you to decrease the amount withheld from your paycheck by your employer, putting more money in your pocket each month. Some people prefer to keep their allowances the same in order to ensure a refund from the IRS, but another way of looking at it is to ask: Why should you loan the US Treasury money all year, interest-free? It’s worth taking a look, at any rate. You may need to check with your payroll office or HR department to see if you need to fill out a new withholding form.
As a fiduciary advisor, I work with parents, grandparents, and others who want to ensure every possible advantage for the next generation, including personalized financial plans for those all-important educational expenses. If you’re wondering about the actual dollar value a college education can provide for a younger loved one, click here to use our free calculator.
Stay Diversified, Stay YOUR Course!