Whenever our clients are expecting their first child, they often come to me wondering what impact this will have on their taxes. As with most things in the tax world, the answer is, “It depends.” There are a few tax items that this little bundle of joy will impact, but much of that has to do with your income level and other aspects of your specific situation.
Child Tax Credit – Beginning in 2018, the child tax credit is expanded to include many more families. The beginning of the phase-out is now $400,000 for joint filers, instead of $110,000. That’s a lot of parents, and a lot of our typical clients fall in that range. The amount per child is also increased to $2,000.
Dependent Care Credit – If you will be paying for childcare once both parents go back to work, you will be eligible for the dependent care credit. Most of the time this works out to $600 to credit against your taxes.
Dependent Care FSA – If your employer provides this type of account, it will allow you to pay for your childcare costs pre-tax. While this will keep you from being eligible for the credit if you only have one child, most of our clients’ marginal tax rates make this route more advantageous as long as it is available.
Household Employment Taxes – If you will be employing a nanny in your home for the first time, this will open you up to the world of payroll taxes. Be sure to review state and Federal guidelines to make sure you are handling this correctly.
Head of Household Filing Status – If you aren’t married, you will now be eligible for a new filing status. If you pay for more than half the cost of providing a home for a qualifying person (your new baby), then you will qualify. The standard deduction and tax brackets are more advantageous than filing Single.
529 Account Savings – With the rising costs of higher education, it’s never too early to start planning. Once your child is born, you can make them a beneficiary of an account. Depending on your state, you may be eligible for a tax deduction. The Federal tax benefit is that the money will grow tax free as long as it is withdrawn for eligible education expenses.
So there you have it, some of the tax implications of your new baby! While you are fretting over nursery paint colors and the safest car seat, at least you’ll already know the changes for your next year’s tax filing.