Uncle Sam knows that having a baby is expensive, so new parents get a few perks on their tax returns. "Signing up for these tax breaks is surprisingly easy, and they offer families real savings," says MP Dunleavey, author of Money Can Buy Happiness. Here's how to reap the financial rewards of becoming a parent.
Take a number
Your baby needs a social security number so you can claim her as a dependent. You were probably given the paperwork to get one at the hospital when she was born, so if you submitted it, you're good to go. If not, go to the website Socialsecurity.gov, download the form, and get it to your local social security office, pronto.
Size up your situation
No more 1040EZ form—you'll need to switch to the longer 1040A now that you have a child. Married couples usually reap the most tax savings by filing jointly, while single parents may benefit by filing as "Head of Household" because they can take a higher standard deduction. The standard deduction for married couples filing jointly is $10,900. However, if you have other deductions that add up to more than this amount, you can "itemize" them on your return for more tax savings. For example, families who own their homes can take deductions for mortgage interest, real estate taxes, and closing costs.
You are eligible for a tax deduction of $3,500 per child, says tax analyst Jackie Perlman, at H&R Block's Tax Institute in Kansas City, Missouri. Your baby can also knock off up to another $1,000 from your tax bill, thanks to the child tax credit. If you pay a daycare center or in-home caregiver to watch your baby while you're at work, the childcare tax credit can save you still more. You can deduct 20 to 35 percent of the annual cost, depending on your income, up to $3,000 for one child or $6,000 for two or more.
Finally, if your income is limited, you may qualify for the Earned Income Tax Credit (EITC), a substantial rebate that's worth looking into. For example, a married couple with one child would qualify if their income is under $36,995. For more details, visit IRS.gov and search for keyword "EITC."
Save for college
Set up a 529 plan—a state-run investment account that allows your money to grow tax-free—for your child's future education. Though you won't get a federal tax deduction for contributing, many states do give one (find out about yours at Savingforcollege.com). You can contribute up to $13,000 yearly per child. And you don't have to pay taxes on your withdrawals if the money is used for college costs.
- If you owe money on a home-equity loan, the interest you pay on your loan is tax deductible for up to $100,000.
- If you sell your home after living in it for at least two years, your profit isn't taxed unless it's over $500,000 if you're married.