Very few events in life can bring such joy and emotion as having a child can. Whether it’s your first (experienced this last year) or your tenth (hope to never ever experience this), nothing can really match up to the happiness you get looking at your newborn for the first time.
And then the bills come. First the hospital bills will slowly trickle into your mailbox. Everyone from the anesthesiologist to the guy who changed the garbage in your hospital room needs to get paid. Then you have to decide how to feed the kid. If you decide to use breast milk, that can save some money but can be time intensive. If you have to go with baby formula, prepare to shell out about 5 times the amount of money you pay for your regular grown up milk. Hopefully you can scrounge up some secondhand clothes from family and friends, but raising a child can cost a pretty penny.
But there is a group that will come to your rescue. The US government. While the government isn’t usually known for swooping in to save anyone who is not a big bank, they do provide some tax relief for those who have children. There are two big tax breaks most parents will get, and other breaks available depending on your situation. These tax breaks won’t make having kids a bargain, but they can potentially save thousands of dollars on your tax bill every year.
Dependency Exemption. This is one of two major tax breaks most parents will be able to get. If you file as a single, you get one exemption. If you file a joint return, you get two exemptions. And you get another exemption for the year for each child you have, even if they were born on December 31. For 2014, the exemption amount is $3,950. So if you have one child, you get to deduct $11,850 ($3,950 times 3) from your income. Not too shabby.
High roller couples, beware, this benefit starts phasing out with an Adjusted Gross Income (AGI) of $305,050 and is completely phased out at an AGI of $427,550.
Child Tax Credit. Tax credits are awesome because they decrease your actual tax TOTAL and not just your taxable income. For 2014, you get a $1,000 credit for each qualifying child. So a family with 3 qualifying kids would get $3,000 off of their tax bill (assuming it doesn’t bring the tax bill to 0 because the credit stops there). This credit can be a great help especially for families with lots of kids. The credit starts phasing out at an AGI of $110,000 and is completely phased out at $130,000.
The Dependency Exemption and the Child Tax Credit are two big tax benefits that many parents will be able to qualify for. There are other tax breaks that will apply for certain situations:
Child Care Credit. This is a credit some can claim for child care expenses that enable the taxpayer to earn an income (like an in-home nanny). For those with AGI’s of $15,000 or lower, they can claim a maximum of $3,000 worth of allowable expenses for one child. The credit is 35% of the allowable expenses. For those with an AGI of $43,000 or higher, the credit is 20% of allowable expenses.
Adoption Credit. Adopting a child can be an honorable venture but it can get really expensive. The government gives a pretty good tax credit in 2014 of $13,190 for adoption costs. The credit stops once your tax bill hits 0. The benefit phase out begins at an AGI of $197,880 and is completely phased out at $237,880.
Child Care Reimbursement Accounts. These can vary by employer but they allow you to set aside pre-tax dollars to use for child care expenses, similar to a flex spending account for healthcare purposes. This can be very helpful as the amount you decide to set aside avoids both state and federal income tax.
These are just a few of the great tax breaks available for having children. Tax filing season is still a few months away, but it’s always helpful to think about these tax breaks now and do what you reasonably can to get them if you’re eligible. And try to enjoy your kids. They don’t stay small and cute forever.
Taxes can get tricky for certain situations, so always consult your tax professional for any specific questions.