Not only does having a child have a profound effect on your life, the event also affects your income taxes. When you have a child, you open the door to several tax credits that reduce your tax and generate a refund. Depending on your financial situation, number of children and filing status, the Internal Revenue Service offers several benefits to claiming a child, including an extra exemption and tax credits.
When you have a child, the IRS allows you to claim the child on your taxes and receive an extra exemption. Along with your standard deduction, exemptions reduce your adjusted gross income (AGI). Because the IRS uses your AGI to determine your tax, reducing your income will in turn reduce your tax. In 2012, you may reduce your income by $3,800 for each person that you claim on your taxes.
The main purpose of a tax credit is to reduce the tax you owe the IRS dollar for dollar. There are two classes of tax credits -- refundable and nonrefundable. Refundable tax credits reduce your tax, and if the credit exceeds your tax, you will receive the remaining amount as a refund. Nonrefundable credits are just that -- nonrefundable. The sole purpose of a nonrefundable credit is to reduce your tax, preferably to a zero balance. The IRS offers several tax credits to taxpayers, two of which require you to have a child to qualify.
Child Tax Credit
The child tax credit is a refundable credit that reduces the tax you owe. The amount of your credit is based on income and number of children in your home. There are income limits to the Child Tax Credit, and as your income reaches the limit, the amount of the credit will begin to phase out, or become lower. The phase-out begins at $75,000 for taxpayers who claim single or head of household, $110,000 for those married filing jointly, and $55,000 for those married filing separately as of the 2011 tax year. The maximum amount that you may receive is $1,000 per child. For more information regarding the limitations and requirements to claim the child tax credit, refer to IRS Publication 972.
When you adopt a child, the IRS allows you to claim the expenses you incur to adopt an eligible child on your income taxes. These expenses include attorney fees, court costs, travel and any other expense directly related to the adoption. Similar to the child tax credit, the adoption credit is a refundable credit that has income limitations. As your modified adjusted gross income reaches the limit, the amount of your credit begins to phase out. The phase out for the adoption credit begins at $185,201. As of the 2011 tax year, the maximum amount of expenses that you may claim in a single tax year is $13,360. To claim the credit, you must report the expenses on Form 8839. For more information on the adoption credit, refer to the IRS Tax Topic 607.
Child and Dependent Care Credit
If your child attends day care or requires dependent care, most of your expenses are deductible on your income taxes. Unlike the Child Tax Credit, the child and dependent care credit is nonrefundable. To qualify for the credit, you must pay a licensed provider to care for your child while you work or search for work. In addition, the child must be under 13 years of age and you may not claim the married filing separately filing status. As of 2012, the maximum credit you may claim per child is $3,000 per year. For more information on the requirements to claim the child and dependent care credit, refer to the IRS Publication 503.
Angela M. Wheeland specializes in topics related to taxation, technology, gaming and criminal law. She has contributed to several websites and serves as the lead content editor for a construction-related website. Wheeland holds an Associate of Arts in accounting and criminal justice. She has owned and operated her own income tax-preparation business since 2006.