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Having a child is momentous, life-changing, a unique experience that makes you reinvent your world, and so much more! And in mentioning the “so much more,” we intend to bring to your attention what having a baby means from the taxation point of view.
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As you can imagine, from the moment your baby is born, there is another person present on your tax return and for quite a long time.
The first important detail is the Social Security number which you need to claim your child as a dependent on your tax return. Failing to report the number for each dependent can trigger a $50 fine and tie up your refund until things are straightened out.
Claiming your son or daughter as a dependent will give you another $4,050 exemption on your income from tax for tax years 2016-2017. Since claiming an extra dependent will cut your tax bill, it also means you can cut back on tax withholding from your paycheck. File a new W-4 form with your employer to claim an additional withholding "allowance."
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You may also qualify for the Child Tax Credit which is an important tax credit that may be worth as much as $1,000 per qualifying child depending upon your income. Here are the most important facts from the IRS about this credit and how it may benefit your family.
Amount - With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.
Qualification - A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence.
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Age Test - To qualify, a child must have been under age 17 – age 16 or younger – at the end of the year.
Relationship Test - To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption. |
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Support Test - In order to claim a child for this credit, the child must not have provided more than half of their own support.
Dependent Test - You must claim the child as a dependent on your federal tax return.
Citizenship Test - To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien.
Residence Test - The child must have lived with you for more than half of the year. There are some exceptions to the residence test, which can be found in IRS Publication 972, Child Tax Credit. |
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Limitations - The credit is limited if your modified adjusted gross income is above the amount shown below for your filing status:
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- Married filing jointly – $110,000;
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- Single, head of household, or qualifying widow(er) – $75,000;
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- Married filing separately – $55,000.
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| To claim the child tax credit, you must file Form 1040, Form 1040A, or Form 1040NR. You cannot claim the child tax credit on Form 1040EZ or Form 1040NR- EZ. |
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You must provide the name and identification number (usually a social security number) on your tax return for each qualifying child and you must either check the box on Form 1040 or Form 1040A, line 6c, column (4); or Form 1040NR, line 7c, column (4).
The Child Tax Credit is non-refundable, which means it can only be used to bring your tax liability to zero.
However, you may be able to receive a portion of the credit that you could not use by claiming the Additional Child Tax Credit. This tax credit is available so taxpayers can take advantage of the unused portion of the Child Tax Credit.
In most cases, it is equal to the unused portion of the Child Tax Credit up to 15% of your earned income that is more than $3000.
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The Additional Child Tax Credit is refundable, which means you will receive the amount awarded in the form of a refund. You should use Form 8812, Child Tax Credit, to calculate the additional child tax credit. You claim this credit on line 65 of Form 1040 or line 39 on Form 1040A.
If you pay someone to care for a child or a dependent so you can work, you may be able to reduce your federal income tax by claiming the Credit for Child and Dependent Care expenses on your tax return. Below are some key points about this credit. |
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Work-Related Expenses. The care must have been necessary so you could work or look for work. For those who are married, the care also must have been necessary so a spouse could work or look for work. This rule does not apply if the spouse was disabled or a full-time student.
Qualifying Person. The care must have been for “qualifying persons.” A qualifying person can be a child under age 13. A qualifying person can also be a spouse or dependent who lived with the taxpayer for more than half the year and is physically or mentally incapable of self-care.
Earned Income. You must have earned income for the year, such as wages from a job. |
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For those who are married and file jointly, the spouse must also have earned income. Special rules apply to a spouse who is a student or disabled.
Credit Percentage / Expense Limits. The credit is worth between 20 and 35 percent of allowable expenses. The percentage depends on the income amount. Allowable expenses are limited to $3,000 for paid care of one qualifying person. The limit is $6,000 if you paid for the care of two or more.
Dependent Care Benefits. Special rules apply for people who get dependent care benefits from their employer.
Qualifying Person’s SSN. The Social Security number of each qualifying person must be included to claim the credit. |
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Care Provider Information. The name, address and taxpayer identification number of the care provider must be included on the return.
To claim this credit, you must file Form 2441 with your tax return. |
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Our intention here was to give you an idea of what it means to you to have a child from the taxation perspective. As your children grow, you will be interested in education tax credits - a subject for another newsletter.
For now, what you can and should do is rely on your tax professional to take care of all your dealings with the IRS and make sure you take advantage of all the credits and deductions you are entitled to. |
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