Having a new baby changes your sleep patterns—and it changes your tax benefits. Here are a few tax tips:
Typically, new parents fill out a birth registration form at the hospital, which has a box you can check to request a Social Security number. But if your bundle of joy wasn’t born in a hospital, or you somehow didn’t get a Social Security number through the birth registration form, you’ll need to make time to visit the nearest Social Security Administration (SSA) branch and request a number in person.
You’ll need to fill out Form SS-5 and have documents to verify your child’s age, identity, and citizenship status—ideally a birth certificate, though a hospital birth record or other medical documents may be sufficient as well. You'll also need to bring a driver's license or passport of your own.
The recently passed third stimulus relief package, known as the American Rescue Plan, expanded the Child Tax Credit. Beginning with your tax year 2021 taxes (the ones filed in 2022), the plan increases the Child Tax Credit from $2,000 up to:
Eligible families may receive an advance payment of up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 and above. Instead of getting this credit as part of your refund in 2022, these payments are sent in advance and represent a portion of the tax year 2021 Child Tax Credit.
The first monthly payment of the newly-advanceable Child Tax Credit was disbursed to eligible families July 15, 2021, and will continue on the 15th of every month following unless the 15th falls on a weekend or holiday. These payments will be sent out through direct deposit, paper check, or debit cards. Don’t leave money on the table—check if you’re eligible for the advance Child Tax Credit.
You may be able to claim the child and dependent care credit on your tax return if you paid expenses for the care of a qualifying individual to enable you and your spouse, if filing a joint return, to work or look for work. The amount of the tax break is a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income. If you use daycare, check with your employer to see if they offer a childcare flexible spending account (FSA). Similar to a health FSA, these accounts allow you contribute money tax-free toward your childcare expenses. You don’t need to itemize expenses in order to take advantage of the child tax credit or the child and dependent care tax credit. You can claim the standard deduction and still get the Dependent Care Credits.
How you classify yourself can affect how much you can deduct from your tax bill and how much money back you qualify for with federal and state tax. The standard deduction for married couples filing jointly for the tax year 2021 rises to $25,100, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,550 for 2021, up $150, and for heads of households, the standard deduction will be $18,800 for the tax year 2021, up $150.
If you’re pregnant, chances are that you visit your doctor and undergo various medical treatments. The cost of these visits and procedures can negatively affect your personal finances, even if you have insurance that covers a portion of the bills. Any year you incur significant medical expenses that relate to your pregnancy, the IRS allows you to deduct a portion of the cost on your income taxes, but only if you are eligible to itemize deductions.
For those who adopted a new child, there’s a tax deduction for you as well. For the 2021 tax season, you can get a tax credit for all qualifying adoption expenses up to $14,440 per child, according to the IRS. Those expenses include reasonable adoption fees, court costs, and travel expenses. If you adopt a special needs child from within the U.S., you can claim the entire credit, even if your adoption costs were less than $14,440.
Once you have a child, it’s smart to set up a 529 plan for your child's future education. You'll be amazed how much that account can grow by the time your child goes to college. Any ScholarShare 529 earnings grow free from federal and state income tax.1 Withdrawals for qualified higher education expenses at approved institutions are tax-free at both the federal and state level. Withdrawals for up to $10,000 of tuition expenses at a public, private, or religious elementary, middle, or high school per student, per year across all 529 plans are also tax-free at the federal level. The earnings portion of any withdrawal used to pay for tuition expenses at a public, private or religious elementary, middle, or high school is taxable at the state level for California taxpayers. See the Plan Description for details. As a 529 plan, ScholarShare 529 college savings plan also offers certain gift and estate tax planning benefits. Consult your tax advisor for more information.
1If the funds aren't used for qualified higher education expenses, a 10% penalty tax on earnings (as well as federal and state income taxes) may apply. Non-qualified withdrawals may also be subject to an additional 2.5% California tax on earnings.