How Does Having a Baby Affect Taxes?
Becoming a parent is a life-changing event that brings immense joy and responsibility. One of the many responsibilities that come with welcoming a new addition to the family is understanding how having a baby affects taxes. This article delves into the various tax implications of parenthood, helping new parents navigate the financial aspects of raising a child.
Child Tax Credit
One of the most significant tax benefits for parents is the Child Tax Credit. This credit allows eligible taxpayers to claim a certain amount for each qualifying child under the age of 17. For tax year 2021, the credit was increased to $3,000 per child, with an additional $1,600 for children who are age 17 or older at the end of the tax year. The credit can be claimed as a refundable credit, which means that if the credit exceeds the amount of tax owed, the excess can be refunded to the taxpayer.
Dependent Exemption
Before the Tax Cuts and Jobs Act (TCJA) of 2017, taxpayers were eligible to claim a dependent exemption for each qualifying dependent, including children. However, the TCJA eliminated this exemption. As a result, parents can no longer claim a dependent exemption for their children, which means they may no longer be able to deduct the standard deduction for each dependent.
Child and Dependent Care Credit
For parents who work or are looking for work, the Child and Dependent Care Credit can be a valuable tax benefit. This credit is designed to help offset the costs of caring for a child under the age of 13 while the parent is working or looking for work. The credit is based on the actual cost of care and can be worth up to 35% of qualifying expenses, with a maximum credit of $3,000 for one child and $6,000 for two or more children.
Estate and Gift Taxes
When it comes to estate planning, having a child can have significant tax implications. While the estate tax exemption amount has been increased significantly over the years, parents may still need to consider the potential impact of estate taxes on their assets. Additionally, parents can take advantage of the annual gift tax exclusion, which allows them to give up to $15,000 per person per year to their children without incurring gift taxes.
Medical Expenses
Parents often incur significant medical expenses for their children. While the deduction for medical expenses is subject to a threshold of 7.5% of adjusted gross income (AGI) for tax years 2017 through 2020, it is scheduled to return to 10% of AGI for tax years 2021 and beyond. This means that qualifying medical expenses for children may be deductible if they exceed the threshold.
Conclusion
Having a baby affects taxes in various ways, from tax credits and deductions to estate planning considerations. Understanding these tax implications can help parents make informed financial decisions and maximize their tax benefits. It is advisable to consult with a tax professional to ensure that you are taking full advantage of the available tax benefits for parents.
