Several years ago, before the peanut came along to completely change our lives, I attended an at-work baby shower for a fellow teacher.
Looking at the enormous haul of loot that my co-worker would be waddling home with (and knowing that she still had a family shower to look forward to), I remarked, “How can anyone afford to have a baby?”
All of the mothers laughed and told me that human race would die out if everyone waited to have a baby until they could afford it.
Fortunately, Uncle Sam recognizes the financial difficulties of expanding the family, and there are quite a few tax breaks available to parents. Here are a few of the most common ways that your kids can help you to achieve lower taxes:
Congratulations! It’s a dependent! Now that you have a new bundle of joy, you qualify for a dependency exemption-meaning in the 2011 fiscal year that $3700 of your income will be sheltered from income tax. And that dependency exemption is for the entire year, no matter when your little monkey arrives.
Child Tax Credit
The stork will also bring you a child tax credit when your baby is born or adopted. The credit reduces your tax bill dollar for dollar-unlike a deduction, which reduces the taxable amount of your income.
Though the amount of the tax credit will go down from $1,000 in 2010 to $500 in 2011, it is still nothing to sneeze at, particularly since this amount is “refundable” for certain low-income taxpayers.
That means that if the tax credit is more than what you owe the IRS, you’ll receive a check to refund the difference.
Child Care Credit
Going back to work? The IRS can help you there, too. Since many parents need to pay for child care in order to go to work (and therefore earn income that is subject to tax), the tax code provides a child care credit for care of children under 13 years of age.
Your income and the cost of care determine how much the credit will be, with a cap of $1,050 for a single child and $2,100 for two.
Adoption Tax Credit
Welcoming a new addition through adoption can be very expensive, and the IRS is extending an adoption tax credit through 2011. This credit is worth a maximum of $13,170 this year-which will certainly help parents adopting from overseas.
If you are becoming the parent of a special needs adopted child, you are entitled to claim the entire amount of the credit, even if the adoption costs did not add up to the full amount.
Tax Free College Savings
As difficult as it is to imagine now, your tiny baby will one day be college-age. Start saving for school now and put the money into a 529 plan.
Though you will not see a deduction on your federal taxes for contributing to a 529, the money grows tax-free, and as long as you use the money for qualifying education expenses, the disbursement is also tax-free.
It’s a wonderful gift to give your child.
No one will ever claim that it’s cheap to become a parent. However, if you take advantage of these tax breaks, your budget will thank you.