How Your Newborn will Affect You Come Tax Time07.17.13
Congratulations on the new addition to your family! Your new baby will no doubt change pretty much every aspect of your life—including your taxes. Let’s look at some of the changes a new dependent brings to your individual income tax return. You’ll probably want to get a shoebox ready to start collecting your receipts.
- All of your out-of-pocket expenses for medical are deductible if you itemize deductions and meet the threshold for out-of-pocket costs. The tax code allows you to claim any unreimbursed medical expenses that exceed ten percent of your adjusted gross income as an itemized deduction. These expenses include any prescription medications for the mom-to-be, all prenatal care, any ultrasounds, blood work, and other lab work and medical tests. Expenses for the hospital, such as the labor and delivery room, mom’s bed, and the baby’s incubator. After the mom and baby go home, there are still medical expenses, such as the after-tax cost of health insurance, the well-baby checkups, mom’s post baby checkup, and many others.
- If you are able to participate in a medical Flex Spending Account (FSA) through your job, you may want to consider starting one. You’re allowed to put up to $2,500 of your pay into the FSA before taxes, which can then be used to pay your doctors, hospital, lab, and prescription fees. It’s convenient to know you have money for these costs set aside, but there is also tax savings because there is no income tax on money put into an FSA and there is no Social Security or Medicare taxes, commonly referred to as payroll taxes, withheld from this money. However, any money left in the account after all your 2013 expenses are paid will be lost, so plan carefully.
- As long as your child is born before midnight, December 31, 2013, you will be able to claim the dependent exemption of $3,900 for your child, or each child if you have more than one. You may be eligible for the Child Tax Credit, a $1,000 credit available for each dependent child under the age of 17 as long as your income is less than $75,000 ($110,000 if married filing jointly and $55,000 if married filing separately). For taxpayers who do not need the full $1,000 per child to reduce their taxes to zero, there is the Additional Child Tax Credit. This credit allows qualified taxpayers to claim the balance of their Child Tax Credit as a refundable credit and pay any additional taxes or increase their refund.
- If you and your spouse will both work after the baby arrives, child care costs up to $3,000 for one child and $6,000 for more than one child may qualify for the nonrefundable tax credit, the Credit for Child and Dependent Care Expenses. Depending on your income, this credit can be up to 35 percent of your qualified expenses and has no maximum income limit. As a nonrefundable credit, you can use the credit to offset your income tax liability only and any unused portion is not allowed as a refund.
- Like the FSA, many employers offer a pre-tax Dependent Care Benefit (DCB) program. You may be eligible to put up to $5,000 total per year in their DCB account, tax-free. The money may then be used to pay eligible daycare expenses during the year, reducing your taxable income. If you have more than one qualifying child in daycare and your expenses exceed the $5,000 maximum, you can claim the credit for any expenses between $5,001 and $6,000. However, like the FSA, make sure you use all the money in the account for your childcare or you will lose the income and must add-back any unused DCB to your wages when doing your tax return.
- Taxpayers with an income of less than $46,227 ($51,567 if married filing jointly) and up to three children may qualify for the refundable Earned Income Tax Credit (EITC) of up to $6,044. The credit amount varies based on total earned income, adjusted gross income and family size. Like the Additional Child Tax Credit, the EITC is available to taxpayers as a refund if their credits, withholdings, and any estimated tax payments exceed their total tax bill.
- These are just a few of the most common tax benefits awaiting new parents. Congratulations again. Now try to get some sleep!