Did your family grow this year? Whether you gave birth to a new baby or adopted a child, you may be surprised by the tax benefits provided by your bundle of joy. Follow these tips to make the most of your tax credit eligibility and ensure a smooth tax season for your family.
Register your child for a Social Security number.
Your child must have a Social Security number in order for you to do any of the following:
Set up a college savings plan or bank account for the child
Add the child to your health insurance plan
Apply for government benefits for your child
Claim child-related tax benefits on your tax return
In most cases, the easiest way to register a new baby for a Social Security number is by requesting one at the hospital. Parents can request a Social Security number for their newborn when they provide information for their baby’s birth certificate.
If your child is not born in a hospital or other circumstances prevent you from requesting a Social Security number at birth, you can visit a Social Security office to submit a Form SS-5 along with proof of your identity and relationship to the child, as well as original documents proving your child’s United States citizenship, age, and identity.
If you are in the process of adopting a child, the Social Security Administration can assign him or her a Social Security number before the adoption is complete. However, you may want to wait until the adoption is finalized so that you can apply for the number using your child’s new name, with your name listed as their parent.
For more information regarding the Social Security number application process, visit this link from the Social Security Administration.
Adjust your withholding amount.
The IRS recommends performing a “paycheck checkup” with every major life event. A new addition to your family means added tax benefits, allowing you to reduce the amount of taxes withheld from each paycheck. If you leave your withholding amount as-is, you will likely receive a larger refund (or lower tax bill) with your next tax return.
To adjust your withholding amount, file a new W-4 form with your employer. The IRS’s online Tax Withholding Estimator tool can help you determine the correct withholding amount for your financial situation.
Check your tax credit eligibility.
Unlike tax deductions, which lower your amount of taxable income, tax credits lower your tax bill dollar for dollar. As a new parent, you may qualify for several tax credits that can substantially lower your tax liability:
Child Tax Credit (CTC)
If you have a qualifying child who is under the age of 17 at the end of the tax year, you may be eligible for the child tax credit. As of Tax Year 2018, the maximum credit amount per child is $2,000. Read about the eligibility requirements for the child tax credit.
If you claim the child tax credit but receive less than the full amount, you may be eligible to claim up to $1,400 per qualifying child as an additional child tax credit. This credit is only available to taxpayers whose child tax credit amount is higher than the amount they owe in taxes. Because this is a refundable credit, it can increase your tax refund even if you do not owe any tax.
Child & Dependent Care Credit
The child and dependent care credit is designed to mitigate childcare expenses. In order to claim this credit, taxpayers must meet several eligibility requirements:
The childcare expenses must be work-related. To be considered work-related, the expenses must meet the following requirements:
They allow you (and your spouse, if married filing jointly) to work, seek employment, or attend school.
They are for a qualifying person’s care.
You (and your spouse, if filing jointly) must have earned income during the year (with some exceptions).
Unmarried taxpayers must file as single, head of household, or qualifying widow(er) with dependent child. Married couples must file a joint return.
You must have paid someone to provide care for a qualifying person. The childcare provider(s) must be identified on your tax return. Learn more about care provider identification here.
Earned Income Tax Credit (EITC)
This tax credit is designed to benefit taxpayers with low to moderate income. This credit reduces your tax bill and may even result in a refund. Individuals who meet certain criteria are eligible for this tax credit:
You must file your tax return as married filing jointly, head of household, qualifying widow(er), or single. You cannot claim the earned income tax credit if you and your spouse choose to file separately.
Your investment income during the tax year must not exceed the predetermined limit ($3,500 for Tax Year 2018).
You cannot file Form 2555 (Foreign Earned Income) or Form 2555-EZ (Foreign Earned Income Exclusion).
You must have made at least $1.00 during the tax year.
Your earned income and adjusted gross income (AGI) must not exceed predetermined limits.
To help you determine whether or not you are qualified for the earned income tax credit, the IRS has provided this helpful guide.
Adoption Credit
Certain tax benefits are available to offset costs associated with adopting a child. These benefits include:
A tax credit for qualified adoption expenses paid to adopt an eligible child (a child under the age of 18 or who is physically or mentally incapable of self-care)
An exclusion from income for employer-provided adoption assistance
Qualified adoption expenses include:
Reasonable and necessary adoption fees
Court costs and attorney fees
Traveling expenses associated with the adoption process
Other expenses directly related to and for the purpose of legally adopting an eligible child
Note that any expenses paid to adopt the child of one’s spouse are not considered qualifying adoption expenses.
The adoption credit is nonrefundable. This means that if the credit amount exceeds your tax liability, you will not receive the excess amount as a refund. However, this excess credit amount may be carried forward for up to five years.
A note on personal exemptions:
Prior to 2018, the personal exemption deduction allowed taxpayers to reduce their taxable income for themselves and every dependent claimed; beginning with 2018 returns, this personal exemption has been suspended in favor of a higher standard deduction.
Save receipts for medical expenses.
If your child requires specialized medical treatment, you may want to consider itemizing these expenses on your tax return. Health care expenses that exceed 10% of your family’s adjusted gross income are tax-deductible. If you meet this threshold, itemizing deductions on your return may yield a lower tax bill or larger refund than taking the standard deduction. If you are considering itemizing deductions on your tax return, be sure to save all receipts related to your child’s medical care.
Meet with an accountant.
When it comes to questions on preparing, filing, and paying taxes, nothing beats the guidance of a qualified accountant. As tax season approaches, consider making an appointment with your local CPA. Contact Seymour & Perry, LLC today.
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