This guest post was submitted by Joy Mali.
There is great joy when a new baby is born into a family! For some, it is a time of celebration. For others, it’s a time of quiet introspection. They wonder if they have what it takes to be a good parent. For everyone, it’s a time to nurture and nourish and watch as the little bundle of joy grows into a confident, mature person. Everyone wonders about the cost of adding a baby to the family. Raising a son or a daughter is very expensive. Clothing, food, education, and housing–these costs add up over time. Smart parents will make sure they are financially secure before adding a child to their family. They make sure they have money saved and will get a copy of their credit report and check their credit score before the arrival of the new baby. Raising children is expensive, so be ready.
But there is good news! When a baby is born into the world, that little bundle of joy can actually help you save money on your income taxes. How does that work? What is the effect of a baby on your taxes? The U.S. government allows parents to take credits and certain deductions which let parents save money on the amount of income taxes they pay. Claiming these deductions actually begins in the year in which the baby is born. Following, are some things you need to know about the tax advantages of having a baby.
Get a social security card. When the baby is born, you will need to get a social security number for them so they can be claimed as a dependent for tax purposes. You can do this at the hospital where they are born. Just fill out the proper form and give the necessary information. The hospital will send the documents to the right office, and the baby’s social security number will arrive in the mail. Of course these forms are not available in all hospitals. If your hospital doesn’t offer this service, or you are unable to complete the forms, for whatever reason, you can get the card through your local Social Security office or send it to them through the mail.
Claim a dependent. For tax purposes, a dependent is generally a child, under the age of 19 (24 if the child is a full-time student), who lives in the same household as the taxpayer for more than six months of the tax year. The taxpayer must have provided more than one-half of their monetary support throughout the year, as well. There are exceptions to this, and you can check with the IRS website for more information. When filing your income taxes, all of your dependents–including your new baby–should be listed, as long as the baby was born in the tax year for which you’re filing. For instance, a baby born before December 31, 2012, would be included in 2012 taxes. A baby born on January 1, 2013, would not. That child would be included in your 2013 taxes. This is the most common effect of baby on taxes. Your dependents find your exemptions for tax purposes.
File for your exemptions. There are two types of exemptions–a personal exemption for yourself and your spouse and an exemption for each dependent you list on your tax return.In short, exemptions cut the amount of income that is considered to be taxable. In tax year 2012, the amount of the exemption for the taxpayer, their spouse, and dependents was $3,800 each. For example, suppose you are married and have three children. You and your spouse had a joint income of $75,000 in 2012. The total exemption for you, your spouse, and three children would total $19,000 ($3,800 x 5). The amount of income on which you would pay taxes is $56,000 ($75,000 – $19,000).
Claim the tax credits. Parents and other taxpayers who qualify to claim a child as a dependent may also be eligible for other tax credits. For instance if you hire someone to care for your child while you work, you could take advantage of the Child Care Credit. Depending on your income, the Earned Income Credit may apply to your family. The Child Tax Credit allows a credit of up to $1,000 for each child, if you qualify. If you are not married, you may qualify as Head of Household which allows an extra deduction.
Take care of your medical expenses. Medical expenses you pay that exceed 7.5% of your yearly adjusted gross income may be deducted. For example, your adjusted gross income is $45,000 and you have $4,475 in medical expenses that you paid. To find the amount of your medical expense deduction, you would multiply $45,000 by 0.075 (7.5 percent). In this case, any expenses exceeding $3,375 can be deducted. This leaves you with a medical expense deduction of $1,100 ($4,475 – $3,375). The medical expenses you can deduct include preventive care, treatment, surgeries, dental, and vision care as well as visits to psychologists and psychiatrists. Prescription medications and appliances such as glasses, contacts, false teeth, and hearing aids are also deductible. In addition, you can deduct travel expenses for medical care such as mileage on your car, bus fare, and parking fees. You cannot deduct any expenses that were paid by a third party (i.e., insurance).
These are just a few of the tax deductions for which you become eligible when you have a baby. They can add up to a nice sum each year. You can then take the money you save on your taxes and put it aside in an interest bearing account to save for future expenses, like college, for instance.
Joy Mali is an active finance blogger who is fond of sharing interesting financial management tips to encourage people to manage their personal finances. More specifically, she advocates that people should check their credit reports on a regular basis.
I do not agree with debt, at all. ...