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Global Tax Insights

Tax Benefits of Having a Baby

March 12, 2015

Did you have a baby in 2014? Find out how adding to your family can impact your taxes.

Congratulations! It’s a …tax break?!? Add your taxes to the list of the many things that change when you welcome a newborn in your life. There are few life events that are as impactful on your life and your taxes as having a baby.

The first step to qualify for any tax benefits is to get a Social Security number for your child. You can request a Social Security card for your newborn at the hospital when you apply for a birth certificate. This is not a task you want to put off. If you wait, it can be a time-consuming activity as you must provide proof of the child’s age, identity, and U.S. citizenship to the Social Security Administration.

Dependency Exemption

In the year your child is born or adopted, you are able to claim your bundle of joy as a dependent. It does not matter when the child was born or adopted during the year. You will still get the full year’s exemption. For 2014, that means $3,950 of your income will be sheltered from tax. This will save you $987 if you’re in the 25% tax bracket. Unfortunately, the value of the exemption is reduced if your adjusted gross income (AGI) exceeds $254,200 if you’re single or $305,050 if you file a joint return. If you’re in Alternative Minimum Tax, you will lose all of your exemptions.

Adoption Credit

If you adopted a child during the year, some of the costs can be offset by utilizing the Adoption Tax Credit. Although it is not refundable, a dollar for dollar credit is available for qualifying adoption expenses incurred up to $13,190 for 2014. The credit is limited based on your modified adjusted gross income (MAGI). For 2014, the credit starts to phase out for families with MAGI above $197,880 and phased out completely at MAGI of $237,880.

Child Care Credit

If you pay for child care to allow you to work you may qualify for a credit on the first $3,000 of care for one child and $6,000 for two or more children. The amount of the credit depends upon your income and the amount paid for child care. Lower income workers with an AGI of $15,000 or less can claim up to 35% of qualifying costs as a credit. The credit percentage drops to a floor of 20% for taxpayers with AGI over $43,000. You can take this credit until your child reaches age 13.

Child Care Reimbursement Account

Similar to a flexible medical expense account, this account allows you to move up to $5,000 per year of your salary into a tax-advantaged account that you can use to pay child care bills. The money diverted into this account avoids federal, state, Medicare and Social Security taxes. You cannot double-dip by using both the account and child care credit. This account must be offered by your employer and can only be signed up for during “open enrollment” periods. Most companies allow you to make mid-year changes if you have a qualifying event including the birth of a child.

Start Saving

It’s never too early to start saving for the cost of college. In my next blog we will discuss options for savings accounts for children. Questions? Contact us.

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