If you’ve had a child in the last year, congratulations are in order! That new bundle of joy brings with it indescribable happiness, but perhaps also uncertainty where your taxes are concerned. If you find yourself wondering how your new snuggle bug will affect your tax return, you are not alone. Determining which tax credits you are eligible for is a great place to start, so you can begin to gather the right paperwork and supporting documentation.
The Child Tax Credit
The Child Tax Credit is the credit that you receive on your taxes for having a child that meets all of the IRS’s requirements from publication 972. Each child can get you up to $2,000 in credit, but only $1,400 of that is refundable (meaning that it’s money back in your pocket in the form of a tax refund check if you qualify for a refund). Generally speaking, your child will qualify for the Child Tax Credit if you meet the following criteria:
- You are married to your spouse
- You have a child together
- That child lives with you
If you’re still wondering if your child qualifies, the IRS made a special tool that you should check out, which is located here.
Divorced or single?
If you are divorced or filing as single, you will need to determine whether or not the other parent is claiming the child, since only one parent or guardian can claim a child at a time. Misfiling can result in your return being rejected, or you could end up with penalties if you incorrectly claim the child as a dependent.
If your child does not qualify for the Child Tax Credit, they may qualify for the credit for other dependents, which has a maximum of $500. The income limit for both of these is $400,000 if filing jointly, or $200,000 if you are filing under another status (Page 4, IRS publication 972).
You may be wondering if you qualify for this credit if your child is adopted. The answer is: it depends. If your adopted child has lived with you for more than half of the year, you may be eligible to claim the child care tax credit, assuming that all other conditions for the credit have been met. Discussing your situation with a tax professional may be the best way to ensure that you have accurately determined your eligibility for this and other credits. You can also consult the flow chart in figure A from the IRS website found here.
While actually birthing a child can be somewhat complicated tax-wise, adopting a child either domestically or internationally can be even more of a headache because of the additional paperwork that you’ll need to file. If the child meets all of the requirements from publication 972, you can file form 8839 to include with your tax paperwork. This form details the qualified adoption expenses and helps you determine whether or not you are eligible for any additional credits. Form 8839 can be particularly important if you have a special needs adoption because that could mean you are eligible for the maximum credit allowable of $14,080.
The wording and requirements can get a little confusing so read carefully. You can also carry forward adoption credits for up to five years, so be sure to consult with your tax professional about your circumstances to make sure you are getting the maximum credit amount available.
In addition to the child tax credit and the credit for qualified adoption expenses, there is a credit for child and dependent care. If you paid expenses for the care of a qualifying child/dependent in order to work, you may be able to claim this credit as long as the child/dependent is under the age of 13. The total expenses to calculate the credit can be up to $3,000 for one qualifying child, or $6,000 for two. It is worth noting that the amount claimed cannot be larger than the smaller of your or your spouse’s income.
You will need to provide several pieces of documentation if you want to claim the child care tax credit. They include:
- Documentation of the cost of care
- Information about the provider – OR –
- Information as a household employer if the care occurred in your home.
Payments to relatives or dependents also have specific requirements, so again, talk with your tax professional to make sure that you have the proper paperwork to claim this tax credit accurately. For more information about specific circumstances, you can visit this webpage. You will need to fill out a form 2441 to attach to your 1040 when filing your return in order to claim this credit.
Having children can be incredibly rewarding but also incredibly expensive. Some people view the tax return as a forced savings account, but if you need more from your paycheck each month, adjusting your withholdings may be the way to go about it. The tradeoff is that claiming more withholding will help you bring more home each paycheck, but it will also reduce the amount that you will receive back in next year’s return.
Be sure to adjust your withholdings with your employer so that your tax situation fits your circumstances. You can determine the amount of withholdings that you should apply towards your coming year by using the IRS tax withholding estimator found here.
If you need to get in contact with the IRS regarding your taxes, here is a helpful list of phone numbers to help met your needs.