"When I took the CPA exam more than 10 years ago, I crammed facts and figures into my head for the tax section. I walked in, took the exam (and passed), then walked out and promptly forgot everything I learned. After welcoming our sweet baby Henry into the world a few years ago, my husband asked me if our taxes would change and I honestly couldn’t recall any specific details. My answer was a very vague, “Uh, I think there’s something related to childcare.” Needless to say, it was time to refresh my memory.
Eria Gellerman is a marketing consultant and writer specializing in the financial services industry. She has her MBA from Duke University and holds a California CPA license.
Parents also need to know that, for each tax filing year, there are various updates (like new benefits or discontinued enhancements from a previous tax year, for example). What this means is that families may be getting a different refund than last year. For further details, you can check out the IRS website’s news section, which is where they publish the most up-to-date tax year information. For more, read on about how your taxes change once you have a child.
Child Tax Credit
New baby, new tax bill, new changes as to how your baby benefits your taxes. Yes, that new little bundle of joy doesn’t just cost money—they will likely help you get a little back this tax season.
For the current 2023 filing season, families are eligible for up to a $2,000 child tax credit (CTC) per qualifying dependent child. However, on January 31, 2024, the House of Representatives passed The Tax Relief for American Families and Workers Act of 2024. This could result in additional child-related tax breaks (such as an increased CTCs) for families who qualify. Unfortunately, this legislation is still under consideration in the Senate as of mid-March. While there are families opting to wait to file their taxes in case the bill passes before they’re due, some sources are saying it’s not worth waiting. The refund may not be much of a jump up in refunds, nor may you actually qualify for the new legislation’s specifications. Ultimately, of course, it’s up to you to do what you think is best for your family.
Whether you’re waiting for potentially enhanced tax breaks or not, here’s what to know about claiming your CTC. You can take full advantage of the CTC if your family’s modified adjusted gross income (AGI) is under $400,000 for married couples filing jointly and under $200,000 for all other filing statuses. Above those amounts, the CTC is reduced by $50 for each additional $1,000 of income. Certain states also offer state-level child tax credits which are worth checking out.
Tax credits are big when it comes to saving on your tax bill. While a tax deduction reduces the amount of your income that’s able to be taxed, a credit reduces dollar-for-dollar the amount of tax you have to pay. You can thank that little baby for shaving $2,000+ off your tax bill this year!
Child and Dependent Care Tax Credit
Parents tend to be more aware of the child tax credit they’re eligible for than the child and dependent care tax credit (CDCTC) they may be entitled to as well. If you’re a working parent—or a parent who’s looking for work or who’s in school full-time—you need to know about this credit. If you qualify for the CDCTC, that means precious extra dollars refunded to you. According to a survey by Care.com, 44% of parents did not claim the expanded child care tax credit on their taxes this year because they were unaware of it.
This credit is worth a percentage of the amount you spend on a qualified childcare provider, up to $3,000 for one child and $6,000 for two. The credit percentage is based on your AGI but will be between 20 and 35 percent. If your AGI is more than $43,000, the maximum credit is 20 percent of your employment-related expenses.
So let’s say you spent $3,000 (or more) on childcare last year: Depending on your income, you could wind up with a tax credit between $600 and $1,050. The catch here is that, if you’re married, both you and your spouse need to be working, looking for work, or enrolled in school full-time.
Adoption Tax Credit
If you’ve adopted a child, there’s a tax credit to help you offset the cost of adoption. Depending on your income, the credit can be as much as $15,950—though if your modified adjusted gross income (MAGI) is more than $279,230, you won’t qualify for the credit.
Medical Expenses
If you had a baby this year, you may have been hit with some incredibly high medical bills. If some of those medical bills were unreimbursed, you may be able to deduct them from your taxable income.
For 2023, you’re allowed to deduct medical expenses that exceed 7.5 percent of your AGI. So let’s say you have an AGI of $75,000 and you had $8,000 in unreimbursed medical expenses: you’d be able to deduct $2,375 of those bills from your income ($75,000 * 7.5% = $5,625. Any unreimbursed qualified medical expenses over $5,625 are allowable as a deduction).
Nanny Tax
It’s not all good news when it comes to taxes, however. If you employ a nanny, the IRS sees you as an employer. As an employer, you’re required to pay social security, Medicare, and unemployment taxes as well as report to the IRS how much you’ve paid them. If you hired a nanny through an agency, they’ll likely take care of that for you. If not, it’s a good idea to figure out what’s legally required and get your tax paperwork sorted.
Online Tax Preparation Services
While this is crunch time for CPAs, plenty of online tax service companies are easy to use and often offer human assistance if you need it. Here are some of our favorites:
TurboTax is probably the most recognizable name in online tax preparation. Simple returns are free, and includes free filing assistance if you file by March 31.
For budget-conscious tax preparers, TaxAct claims to save you 20 percent on preparation costs vs. TurboTax.
Simple TaxAct returns also start at $0. Plus, expert tax assistance may be included for free if you qualify.
While known for their brick-and-mortar locations, H&R Block also offers the ability to file your own taxes online starting at $0 for simple returns.
