Here
Comes Baby! Taxes
Believe it or not, there is a financial advantage
to having a child. You not
only gained a loved one, you also gained a dependency
exemption you
can deduct on your tax return.
Apply for a social security number for your
child within a year after his
or her birth. That will make
the baby "official" in
the eyes of the IRS and that's
the first step in getting your
deduction.
Who is a dependent?
There are five requirements
that a person must meet to
be your dependent.
- This person
must be a relative
or at least have lived in your home
as a family member all year.
- If the person is
married,
he or she can't file
a joint return. This probably
isn't a consideration
for a newborn.
- This person must
be a United States citizen,
resident alien or a
resident of Canada or Mexico.
- This
person must have a gross
income of less than $3,000,
unless the person is under
the age of 19 or a full time student
under the
age of
24.
- You must have
provided more
than 50% of the person's total
support for the tax year
for which you
are taking the deduction.
Tax
credits
Tax credits differ
from deductions
in that they don't just
lower your taxable income,
they actually directly
lower the tax you owe.
So a $1 tax credit
will lower
the tax you owe
by $1.
If you pay for
someone to
take care of your child, for
example day care or a
nanny, you may receive
a tax credit
equal to 20% to 30% (depending
on your income) of qualified
childcare expense,
up
to $2,400 for
one child
or $4,800 for
two or more children.
Be sure to keep all payment
records, including
receipts, for all childcare
expenses.
You will need them to substantiate
your expenses.
Nursery school,
private kindergarten,
after school programs
and day
care are
all qualifying
expenses.
Flexible
spending accounts
Some companies
offer their
employees
flexible
spending accounts as a benefit.
These accounts
allow employees
to have
from $2,000
to $5,000
a year
deducted from their paychecks
pre-tax.
This money can be spent
on healthcare
and childcare
for the
family.
All of
these
tax issues have complexities
that
are not covered
here. To find out
exactly
how you
can benefit the most from
federal
tax laws, as well as
the state
and local tax laws that
apply
to you, ask
a professional
accountant for advice. |
