How Your Taxes Change Once You Have a Child

When I took the CPA exam over 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 child tax credit has grown to up to $3,600 for the 2021 tax year. You can take full advantage of the expanded credit if your family’s modified adjusted gross income is under $75,000 for single filers, $112,500 for heads of household, and $150,000 for those married filing jointly. It begins to phase out at certain income levels.

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 $3,000+ 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 $4,000 for one child and $8,000 for two. According to IRS.gov, “the American Rescue Plan Act of 2021 made the credit substantially more generous (up from $3,000 and $6,000 in previous years) and potentially refundable, so you might not have to owe taxes to claim the credit (so long as you meet the other requirements). This means that more taxpayers will be eligible for the credit for the first time and that, for many taxpayers, the amount of the credit will be larger than in prior years. However, taxpayers with an adjusted gross income over $438,000 are not eligible for this credit even though they may have previously been able to claim this credit.”

The percentage of the credit is based on your adjusted gross income but will be between 20-35%. 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.

 

mother and child

Source: @whatshepictures via #sharetheeverymom

 

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 $14,440 — though if you earn more than $256,660, 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 2019, you’re allowed to deduct medical expenses that exceed 7.5% 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).

 

Nanny tax

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.

 

Still need to file your taxes?

While this is crunch time for CPAs, plenty of online tax service companies are easy to use, often offered with the help of an actual human if you need it. Here are some of our favorites:

TurboTax

TurboTax is probably the most recognized name in online tax preparation. Start your return for free with filing costs starting at $59.

tax preparation

TaxAct

For budget-conscious tax preparers, TaxAct claims to save you 20% on preparation costs vs. TurboTax, with a similar offering starting at $46. Get expert help up to 4/7/21.

H&R Block

While known for their brick and mortar locations, H&R Block also offers the ability to do your own taxes online starting at $80.

This article was originally published in January 2020. It has been updated for timeliness.

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