Four tax mistakes new parents make (and how to avoid them)(Read article summary)
Raising a child from infancy to adulthood isn't cheap. Fortunately, kids come with some valuable tax deductions and credits which can help along the way.
Clem Murray/The Philadelphia Inquirer via AP/File
Raising a child in America isn't cheap. CNNMoney and FutureAdvisor reported that it would cost $245,340 to raise a child born in 2013 from birth through age 18.
That's a lot of money. But your children can actually save you dollars one time each year: When you're preparing your income taxes. Kids come with some valuable tax deductions and credits. The problem? Many new parents, understandably overwhelmed with the burdens of taking care of a baby, fail to claim these savings.
And that can cost them thousands of dollars. If you are a new parent, don't pass on these key tax savings.
1. Skipping the Child Tax Credit
The child tax credit shouldn’t be overlooked. If you had a new baby in 2015, whether through birth, adoption, or the foster care system, you can claim this additional $1,000 tax credit. It doesn't matter, either, on what day of the year you became a new parent. You can claim the credit even if you had your child on Dec. 31. Your child just needs to be younger than 17 at the end of the tax year in which you are claiming the credit.
"Having a baby gives you access to a tax bonus, and will help you reduce your taxable income," said David Hyrck, partner with New York City's Reed Smith. "I see way too many new parents who overlook this child tax credit. Everyone needs to be doing this."
There is one downside to the tax credit: It is nonrefundable if the credit is higher than your tax liability. Say you owe the government $500. Your $1,000 child tax credit will erase the money you owe the government. But you will lose the extra $500 that you could have claimed if you owed more than $1,000 on your tax bill.
2. Forgetting to Adjust Withholdings
Michael Eckstein, owner of Michael Eckstein Tax Services in Huntington, New York, says that new parents need to adjust the amount of money that their employers withhold from each of their paychecks for taxes.
To do this, ask your employer for a new W-4 form. Once you have that form, indicate that you have a new child.
Eckstein says that it's important to do this because children bring with them new deductions and credits. You should also tell your employer to reduce the amount of money you’re withholding to account for these new tax benefits.
If you don't, you will receive a larger tax refund. But remember: Getting a big refund isn't the goal. You'd rather have that extra money in your own hands with each paycheck. You can then use that money for important purchases, or you can invest it and watch it grow. That's a better alternative than giving it to the U.S. government for a full year.
3. Missing Out on Adoption Credits
If you became a new parent this year through an adoption, you're eligible for a significant federal tax credit of as much as $13,400. That's a big help with the high costs that can come with adopting.
You don't have to use this tax credit in just one year, either. Say your bill for the 2015 tax year is $5,000. You can use $5,000 of the $13,400 tax credit and then save up the rest of the credit for future years. You can carry over any unused portion of the adoption tax credit for up to five years or until you use up all of the entirety of the credit, whichever comes first.
To take this credit, your adopted child must be under 18 at the end of the tax year.
4. Skipping the Child and Dependent Care Credit
New parents should also investigate the child and dependent care credit. This tax credit benefits parents who are working and must pay others to care for their children. To qualify for this credit, both you and your spouse must have earned money during the year from a job and must have paid someone to care for your child while you were working.
Calculating how much you can claim for child care expenses is complicated, and depends on how much you spend on childcare, as well as your income. The maximum amount of expenses that you can claim for one child is $3,000, and for two or more children, $6,000.