Your little bundle of joy brings you an extra bundle of money when you file your taxes each year. Changing your withholding to account for this change means you keep money in your pocket instead of giving it to Uncle Sam. You may change your withholding at any time to shift the amount withheld from your paycheck that will go to pay your federal income taxes. You don't need to wait until your baby arrives. Just be aware if you don't withhold enough money by the end of the tax year, you may end up owing money in April along with an underpayment penalty.
When you have a baby, you are allowed to reduce your taxable income by claiming an exemption for your new dependent : $3,900 starting in the 2013 tax year. A worksheet on Form W-4 assists you in determining the number of allowances -- which equal exemptions -- you should claim so the amount taken out of your paycheck over the course of the year equals what you will owe when paying your taxes.
Child Tax Credit
Children under 17 also qualify for the child tax credit in most circumstances. Your baby must be born before Dec. 31 of the calendar year to claim the $1,000 child tax credit for that year. With a due date in the spring, summer or fall, there is no problem changing your withholding early to account for the additional tax credit. If your due date is iffy or close to the end of the year, you may want to wait and get a refund for overpayment for the year -- otherwise you risk an underpayment penalty.
The IRS assesses an underpayment penalty for taxpayers who do not pay enough estimated tax throughout the year. As long as the amount you owe is less than $1,000 you may avoid the underpayment penalty. The IRS also does not charge an underpayment penalty for taxpayers who pay estimated taxes equaling the amount of taxes owed the previous year. The IRS calculates the amount of your penalty when you file and sends you a bill for the total amount.
Contact your employer or human resources department to change your withholding You need to fill out a new Form W-4 and claim an additional allowance to lower the total withheld from your check. The IRS offers a withholding calculator to accurately calculate the total allowances you should claim on your W-4 (see Resources).
Unless you are strapped for cash, you won’t miss what you haven’t been counting in your budget. Bankrate.com recommends setting the additional money aside in a savings account instead of counting it toward your spending money. An emergency fund is a practical way to account for any unexpected baby expenses that occur, such as doctor’s bills or time away from work.
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- IRS Penalties for Underwithholding
- Relationship Between W-4 Allowances & Tax Return Amount
- What Happens When Half the Year You Claim Single & Half the Year You Claim Married?
- What Determines How Much You Get Back on Your W-2 Taxes?
- Maximum Amount of Income Tax That Can Be Owed Without IRS Penalty