“Will I save a bunch on my taxes once I have a kid? Something’s got to offset those astronomical daycare expenses!”
Uncle Sam would offer babysitting services if he could, but since the CDC estimates 3,985,924 rugrats were born in 2014, good luck trying to schedule him.
In lieu of babysitting, push presents, or registry gifts, he thinks some tax savings for you and your young family should suffice.
Child Tax Credit
You’ll shave up to $1,000 off your tax bill every year until your child turns 17. However, this credit starts to phase out for single filers earning over $75,000 and joint filers earning over $110,000. Think of that extra cash you’ve freed up as diaper money.
If you pay for childcare while you’re working or looking for work, you can also file for a childcare credit and receive up to 35% back on the first $3,000 you spend on one child or $6,000 if you have two or more children under the age of 13. Of course, the credit amount will range depending on your income- Uncle Sam can’t babysit for everyone.
Childcare Reimbursement Account
Also known as a Dependent Care FSA (that’s Flexible Spending Account, if you’re not already in the know), you can put your pre-tax dollars into a sheltered savings account- up to $5,000- if your company offers it as part of your benefits package. You get reimbursed only for expenses that fall under your account balance- so if it’s early in the year and you don’t have your balance built up to cover a larger expense, you can’t use your childcare reimbursement account to cover said expense.
Earned Income Credit
If you’re in a lower-income bracket, you’ll be excited to see that EIC leapfrog up once children enter your tax picture. For the 2014 tax year, the income bracket for the EIC jumped to almost $44,000 and you could’ve claimed up to $3,359 with one child versus the $503 maximum without one.
Head of Household Filing
Head of Household is a break for single or unmarried taxpayers who claim a qualifying dependent. With a HoH filing, you lower your tax bracket and claim a higher standard deduction. There are a few catches: you must have paid more than half the cost to “keep your home” (paid the rent, the utilities, and the grocery bill, to name a few expenses); you must be single or considered unmarried (translation: not filing a joint return and your spouse didn’t live with you anytime during the last six months of the year); and your child/stepchild/foster child lived with you for more than half the year.
When you dream of cuddling with your new baby, you’re probably not imagining the bundle of adoption and legal fees, pre-adoption counseling, and the housing and travel arrangements leading up to your child’s arrival. You can, however, take advantage of an adoption tax credit- in 2014, the credit was worth up to $13,400- in the year that your adoption is finalized. If you’re married and your joint income tops $201,010, the credit begins to phase out.
If you hire a nanny through an agency, the agency will most likely take care of any tax particulars. If you decide to use an independent full-time caregiver, you could be viewed as an employer by the IRS and you’ll need to pay for your caregiver’s social security and unemployment taxes and report their wages on a W-2 form. If you think paying your nanny under the table is a better work-around, the potential for a fine of up to $25,000 might hopefully dissuade you.