Having a baby is a life change that has major implications on your personal finances. Taking care of babies is expensive, especially if you have to pay for daycare. The government recognizes the financial difficulties parents face in raising kids and offers tax breaks to ease the burden. Having a baby is almost certain to reduce your tax liability, but the exact amount of the reduction depends on various factors, such as your income level and your childcare needs.
Babies are the epitome of the term "dependent." Babies depend entirely on their parents for support, so as long as your child lives with you, you can claim a dependent exemption on your tax return. For the 2011 tax year, the dependent exemption was equal to $3,700 for each qualifying child. You can continue claiming an exemption on your child as long as he lives with you, does not pay for more than half of his own support and is under the age of 19. Exemptions do not come off your tax bill directly. Rather, you do not pay taxes on this amount. For example, if you were in a 15 percent tax bracket, you would save about $555 with this exemption.
Child Tax Credit
The IRS offers a child tax credit that shaves $1,000 off your tax liability for each qualifying child. Your child qualifies if you claim her as a dependent and she is under the age of 17 at the end of the year, lived with you for more than half the year and did not pay for more than half of her own support. If your child files a tax return you can't take the credit, but that's not something you'll typically need to worry about with a newborn. This credit begins to phase out at $75,000 in annual income for single taxpayers and $110,000 for married taxpayers filing joint returns.
Dependent Care Credit
The dependent care credit is an extra tax credit for parents that pay for childcare so that they can work. According to the IRS, the credit is worth up to $3,000 for one child and $6000 for two or more children. The credit is only available if you pay for care so that you can work or look for work. If you are married, you and your spouse must both work or be looking for work to qualify, unless your spouse is a full-time student or disabled.
The total tax impact of having children depends on how much money you make, the number of children you have, and your childcare expenses. For instance, if you make $70,000 a year, face a top income tax rate of 25 percent, and don't pay for child care, the dependent exemption saves you $925 and the child tax credit saves you $1,000 for each child that you have. If you make more money and face a higher income tax rate, the dependent exemption stands to save you more money, but you might not qualify for the child tax credit.
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