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 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.
Parents also need to know that, for the 2022 tax filing year, many of the enhancements made under the American Rescue Plan Act of 2021 have expired, so families may be getting a smaller refund than the previous year. Here’s more about how having a child changes your taxes.
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 2022 filing season, the child tax credit (CTC) returned to 2019 levels, meaning families may be eligible for up to a $2000 CTC per qualifying dependent child for the 2022 tax year (down from $3,600 for the 2021 tax year). You can take full advantage of the credit 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 like California and New York also offer state-level child tax credits.
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.
Child and Dependent Care Tax Credit
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. According to a survey by Care.com, 34% of parents did not claim the expanded child care tax credit on their 2021 taxes, and 43% said that’s 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 $14,890— though if your modified adjusted gross income (MAGI) is more than $263,410, 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 2022, 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).
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 $0 if filed before 3/31. 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 is included for free if you start your return by 3/20. 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.
TurboTax is probably the most recognizable name in online tax preparation. Simple returns are $0 if filed before 3/31.
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 is included for free if you start your return by 3/20.
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.
This article was originally published at an earlier date and has been updated for timeliness.