Tax Benefits for New Parents

I was blessed with my first two grandbabies this summer!

Stone's PictureGrace's Picture2

(Stone Alexander and Grace Jenna)

While Grammie won’t realize any tax benefits from the birth of these two babies, their parents will become eligible for a whole new set of tax breaks.

 

Dependents

 

Claiming your son or daughter as a dependent will shelter $4,050 (in 2016) from income taxation. In most cases, you can claim your child as a dependent regardless of when he or she was born in 2016.  You will need to include your child’s Social Security number on the tax return in order to claim the dependency exemption. A little trivia, the IRS first required taxpayers to include the Social Security number of dependents in 1987, for the 1986 tax year.  On April 15, 1987, seven million children vanished; that is, children who had existed only as phantom exemptions on prior year tax returns were no longer claimed as dependents because of the new requirement.

 

Child Tax Credit

 

A $1,000 tax credit is allowed for all dependent children under the age of 17. Parents with higher income will lose some or all of the benefit of the child tax credit.  Phase outs begin at adjusted gross income of $110,000 for taxpayers filing joint returns and $75,000 on single and head of household returns.  These amounts have not been adjusted for inflation since the credit was first introduced in 1998.

 

Child and Dependent Care Credit

 

Parents may be able to claim the child care credit if they paid someone to care for their child under age 13, so they could work or attend school full time. The amount of the credit depends on taxable income and the amount paid for care.  The amount allowed for child care is up to $3,000 for one child and up to $6,000 for two children.  These amounts are not indexed for inflation, typical child care expenses far exceed these limitations.  Important to note, if you want to claim the child care credit, you will need the Social Security number of the individual or the Employer Identification Number of the center providing the care.  The child care credit is calculated and reported on Form 2441.

 

Earned Income Tax Credit

 

The earned income tax credit is a special provision in the tax code designed to encourage individuals to become employed or to continue working despite low earnings.

Taxpayers may qualify for the earned income tax credit without qualifying children, but the income limit is quite low, $13,820 and the maximum credit is $506. However, with the addition of just one baby, the income phase out threshold increases to $23,740 and the maximum credit increases to $3,373.

 

 

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