Having a new baby changes your sleep patterns—and it changes how you file your taxes. Here are a few 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 baby 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.
Families can deduct up to $2,000 from their federal income taxes for each qualifying child under 17. These are credits, so if your tax bill is $10,000 and you qualify for the maximum credit, your bill goes down to $8,000. Even if you don’t owe any money to the IRS, you can get that money back as a refund as long as you’ve earned at least $2,500 to qualify. However, once a single taxpayer’s income reaches $200,000, or a couple’s income (filing married jointly) reaches $400,000, the credit starts to phase out.1
Parents who use a daycare or childcare service may be eligible for the federal Child and Dependent Care Tax Credit (CDCTC). The CDCTC allows parents a credit of up to 35% of these out-of-pocket costs—up to $3,000 for one child or up to $6,000 for two or more. If you use childcare, check with your employer to see if they offer a childcare flexible spending account. 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. The standard deduction for a single person in 2020 was $12,400, which is the amount of income that’s not subject to federal income tax. But if you’re a single parent, you can file as head of household, which has a bigger standard deduction of $18,650 for 2020. If you’re married and filing jointly, having a child won’t change your filing status.
If you’ve had a baby, you can get a tax break on relevant medical expenses if you itemize your return. For those filing 2019 taxes, you can deduct the total out-of-pocket costs of qualified medical expenses for the year that exceed 7.5% of your adjusted gross income. That’s your total gross income minus any student loan payments or contributions to IRAs and HSAs you’ve made throughout the year.
Let’s say you make $50,000 and your student loan payments and IRA contributions add up to $5,000 for the year. That means your adjusted gross income is $45,000. After insurance, the cost of having your baby came to about $6,800. To figure out your deduction, multiply $45,000 by 0.075 (7.5%). That comes to $3,375, which means any money you’ve spent above that amount can be deducted. In this case, that would be $3,425.
For those who adopted a new child, there’s a credit for you as well. For the 2019 tax season, you can get a tax credit for all qualifying adoption expenses up to $14,080 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 $14,080.
Once you have a child, it’s smart to set up a 529 plan for college savings. You will be amazed at how much that account can grow by the time your child goes to college. Any ScholarShare 529 earnings grow free from federal tax.2 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 are taxable at the state level for California taxpayers. See the Plan Description for details. As a 529 plan, ScholarShare 529 also offers certain gift and estate tax planning benefits; consult your tax advisor.
1Consult your legal or tax professional for tax advice.
2If 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.