When I took the CPA exam 10 years ago, I crammed facts and figures into my head for the tax section. I walked in, took the exam (and passed), and then walked out and promptly forgot everything I learned.
After welcoming our sweet baby Henry into the world in 2018, 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. Having a child does change your taxes. Here’s how.
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 — he or she will likely help you get a little back this tax season.
The most recent child tax credit is worth $2,000 and is available to single filers with incomes up to $200,000, and joint filers with incomes up to $400,000.
Tax credits are big when it comes to saving on your tax bill. A tax deduction reduces the amount of taxable income you have, but 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.
Childcare tax credit
No, this isn’t a repeat from the item above. Similar name, but different benefit. If you’re a working parent – or a parent looking for work or are in school full-time – this credit is going to save you money.
This credit is worth a percentage of the amount that you spend on a qualified childcare provider, up to $3,000 for one child and $6,000 for two. The percentage of the credit is based on your adjusted gross income but will be between 20-35 percent. 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 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 $13,840 — though if you earn more than $247,580, you won’t qualify for the credit.
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 2019, you’re allowed to deduct medical expenses that exceed 7.5 percent of your adjusted gross income. Let’s say you have an adjusted gross income 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. Anything that you’ve paid over $5,625 is allowable as a deduction).
It’s not all good news when it comes to taxes. 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 is legally required and get your tax paperwork sorted.