Congratulations on your bundle of joy! Between diapers, daycare, and doctor’s bills, the first year of your child’s life can lead to a slow (or fast) depletion of your savings accounts. It’s also time to think about some tax tips for your new family!But, the good news (you know, aside from getting to enjoy your child’s development), is that kids can help you save a bundle at tax time. We’re partnering with TaxSlayer to share with you important tax info for new parents in 2020.TaxSlayer makes tax filing easy for growing families because their pricing – like their software – is straightforward! There are no surprises with TaxSlayer Classic. When it comes to forms for dependents, child tax credits, and more, everything is included.
Changes to the U.S. tax laws in 2018 effectively phased out the personal exemption for dependents. For a lot of families, this was an important tax break that was no longer available. As a way to balance out this loss, the amount that taxpayers could receive for the Child Tax Credit doubled. The Child Tax Credit today is worth $2,000 per child and is refundable up to $1,400 per child. That means if your total tax liability is $0, the remaining credit can actually come back to you in your refund. Single tax filers are eligible for the Child Tax Credit if they earn less than $200,000 (with phaseouts up to $240,000). Joint filers are eligible for the credit if they earn less than $400,000 (with phaseouts up to $440,000).Your child will need a Social Security number to qualify for the Child Tax Credit. You probably applied for it at the hospital, and it usually takes just a few weeks for the card to come in the mail.
As a quick note, this is an individual or couple’s adjusted gross income. Above the line deductions (such as 401(k) contributions or student loan interest deductions) are subtracted before it is determined whether you’re eligible for the EITC. That means a couple with two children that earns $67,000 and contributes $15,000 to a 401(k) could be eligible for the Earned Income Tax Credit. Combining the above the line deductions with EITC can be a useful strategy for families where one parent chooses to stay home to care for the children.Confused? You don’t have to be – TaxSlayer will help you figure out exactly what you qualify for.
If you’re working or attending school, you may receive a tax credit for a portion of your childcare expenses, depending on your income level. You must be engaged in eligible activities to claim this credit, but if you do qualify, it’s worth 20-35% of the total amount you spend on childcare (up to $3,000 for one child or $6,000 for two). Children must be under age 12 to qualify for this credit.As a side note, if your work offers a daycare FSA, it is often more advantageous from a tax perspective to use that FSA as opposed to relying on the childcare tax credit.You can also combine the two in certain cases. For example, if the FSA allows you to contribute a maximum of $5,000, and you paid $24,000 in childcare expenses for your two children, you can claim $1,000 towards the childcare credit on top of the $5,000 of untaxed savings from you paycheck.
Parents who have significant income and assets may need to think beyond claiming child tax credits for their tax planning. For these parents, 529 Savings Plans can be a great way to save on state income tax and invest for their children’s education. Some states offer tax breaks when you contribute money to your child’s 529 plan. That can be a great way to save on taxes today and invest in your child’s future.Another often overlooked investment vehicle is a Roth IRA. To put money into a Roth IRA, your child must have earned income. But you can contribute up to the amount that your child earns (up to $6,000 max in 2020). So, if you have a child who has earned $600 from pet-sitting, raking leaves, shoveling driveways, and babysitting, consider contributing $600 to a Roth IRA for them. Your child can withdraw that $600 for college, or let it grow tax-free for decades.
Having a baby is exciting – but it can make your taxes more complicated. If you’re like most new parents, you might simply be overwhelmed with everything else going on in your life.Fortunately, you don’t need to stress about your taxes. TaxSlayer makes preparing your return simple and easy.