Having a baby changes your life in every way. One of those ways is taxes. There are a variety of tax benefits related to having children.
The Child Tax Credit provides up to $2,000 of credit for each child under age 17. This benefit is available to all but the highest income taxpayers. The credit begins to phase out when income exceeds $200,000 for all filers except MFJ, for whom the credit begins to phase out at $400,000 in income. A portion of this credit can be refundable.
If you incur childcare expenses to enable you to work, you may be able to take the credit for child and dependent care. The credit is equal to up to 35% of the first $3,000 in childcare expenses for one child. For more than one child, the amount increases to $6,000. This credit is not refundable, so it can only reduce your taxes to zero. Related to this, an employer can provide up to $5,000 in dependent care benefits without the benefits being included in income. However, the same expenses cannot be used for both the credit and employer benefits.
The earned income tax credit (EITC) is available to certain taxpayers who do not have children, but the biggest benefits are reserved for taxpayers with children. The EITC ranges from $560 to $6,935 for 2023, based on the filing status, income, and number of children. The EITC is a refundable credit.
If you built your family through adoption, you may be able to take a credit for some of your expenses. In 2023, up to $14,300 is allowed for each child. If the adoption is not finalized, you can take the credit in the year after the expenses are incurred. If the adoption is finalized, then expenses can be taken in the year finalized. For foreign adoptions, expenses can only be taken in the year the adoption is finalized. Using the rules of your state, if the adoption is determined to be a special needs adoption, you can take the entire credit even if you did not incur $14,300 in expenses.
New legislation: To assist with adoption or the birth of a child, the SECURE Act, signed in December 2019, adds an additional exception to the penalties for taking an early distribution from a retirement account. If the distribution is used for a qualified birth or adoption, there is no penalty. A distribution for qualified birth or adoption is for expenses incurred within one year of the birth or adoption of a child. The distribution is limited to $5,000 per individual. So, if you’re married, each spouse can take $5,000.
If you are not married, or are considered unmarried, you may file as head of household (HOH). This provides a higher standard deduction and increased thresholds on several credits and deductions. In order to qualify as head of household, you must be unmarried or considered unmarried, have a qualifying person living with you and pay more than half of the upkeep of the home.