4 Things New Parents Need to Know About Taxes

Babies and taxesBecoming a parent is one of the biggest transformations you'll ever go through. As you consider nursery-room renovations, midnight feedings, diaper changes, and the other challenges of parenthood, probably the last thing on your mind is the impact that having children can have on your income taxes.

Fortunately, when it comes to taxes, the news for parents is generally good.

Here's a brief look at some of the ways that having children can help you save on your tax return.

What New Parents Must Know About Taxes
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4 Things New Parents Need to Know About Taxes

A child typically counts as a "dependent" for tax purposes, which means that you get to claim an extra personal exemption on your tax return. For 2012, that gives you a $3,800 reduction in your taxable income, which can equate to savings of as much as $1,330 on your final tax bill depending on your tax bracket.

The child tax credit lets you reduce your tax bill by as much as $1,000 for each child you have. Unlike the personal exemption, though, not all taxpayers qualify for the child tax credit. Joint-filing taxpayers making more than $110,000 or singles making more than $75,000 may have all or part of the credit phased out.

Other tax credits may also apply, depending on other factors. For instance, the Earned Income Tax Credit expands to cover wider income ranges for people with children than for those who aren't parents. In addition, if you incur child-care expenses as a new parent, you may qualify for the Child Care Tax Credit, which gives you tax savings on a portion of what you have to spend on day care or similar expenses.

If you adopted your child, there are substantial adoption-related credits available, with the maximum amount for 2012 currently set at $12,650. These credits are vital for many families in offsetting the huge expenses involved in most adoptions, and they don't start to phase out until taxpayers hit about the $190,000 mark in adjusted gross income.

For married joint filers, having a child doesn't have an impact on your filing status. But being a single parent can often allow you to file as a "head of household," which can lead to substantial tax savings. The brackets for head-of-household filers are wider than those covering single taxpayers, meaning that you get to take advantage of lower tax rates for more of your income.

In most cases, children don't have to file income tax returns. But if you decide to put investments in your child's name and they end up producing enough income to trigger filing requirements, then you'll need to file a return on behalf of your child when tax time comes.

That can actually be a smart tax move for some parents. Without earnings, a child's tax rate is usually lower than what the parents pay. Although the so-called "kiddie tax" limits how much income you can earn at the child's lower rate, you can still shelter as much as $1,900 in income from higher parental rates -- which can produce decent overall savings.

In order to get any of these benefits, the first thing you have to do is sign your child up for a Social Security number. Without it, you won't be able to complete your tax forms properly, and it'll be harder for you to claim your deductions and credits.

Fortunately, getting a Social Security number is easy. Typically, if you give birth at a hospital, the staff there can get the ball rolling at the same time they obtain an official birth certificate. Otherwise, you can go to a Social Security office with the appropriate paperwork. Click here for more information from the Social Security Administration.

Congratulations! Having a child is exciting for much more important reasons than tax savings. But by getting the tax stuff out of the way, you'll have more time to enjoy your child and get used to your new life as a parent.

Having a child is exciting for much more important reasons than tax savings. But by getting the tax stuff out of the way, you'll have more time to enjoy your child and get used to your new life as a parent.


Motley Fool contributor Dan Caplinger has enjoyed the tax and other benefits of his daughter for seven years. You can follow him on Twitter here.

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