Are you adding a baby to your family in 2018? You may be able to score some big tax breaks thanks to your new family member. The key is understanding what new tax credits you can claim and how to take full advantage of them.
Having a baby is pretty expensive, so you should take all the help Uncle Sam is willing to give you. Let's look at three big tax breaks that qualifying parents should claim -- as well as one that the recently passed Tax Cuts and Jobs Act eliminated.
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You can claim an expanded child tax credit
Under 2017 tax rules, moms and dads could claim a child tax credit worth up to $1,000 per child, but only with an income below $110,000 for a married couple or $75,000 for singles and taxpayers filing as head of household.
Starting in 2018, the child tax credit has doubled, so your newborn might get you a $2,000 credit. The income threshold has also been raised: Single filers can claim the credit with incomes up to $200,000, and married couples can get their credit with a household income as high as $400,000 on a joint return.
Tax reform also made another important change to the child tax credit. Previously, the credit was nonrefundable (although some families qualified for an additional child tax credit that was refundable). Now, up to $1,400 of the child tax credit is refundable. If your total federal tax bill is just $100, for example, then credit could reduce your tax liability to $0, and then you'd get back $1,300 from the government.
There is a catch, though. The refundable portion of the credit is capped at 15% of earned income exceeding $4,500. You'd need to earn at least $13,833 to get the full $1,400 refund back.
Remember, this is a tax credit, not a tax deduction. Credits are much more valuable, because while a deduction reduces your taxable income, a credit gives you a dollar-for-dollar reduction on the taxes you owe.
You may be eligible for the earned income tax credit thanks to your baby
The earned income tax credit (EITC) isn't a credit you get specifically for having a child. Instead, it's a credit for lower-income families. However, having a child significantly raises the amount of income you can earn and still be eligible for the EITC. So if you weren't eligible before, but you've added a new member to your family, then you should find out whether your baby will make it possible to claim this credit.
In 2018, the income limit for claiming the earned income tax credit is $15,270 if you are single with no kids, and it is $20,950 if you're married filing jointly without a baby. Your first child raises the income limit to $40,320 for singles and $46,010 for married-filing-jointly households. The income limits are even higher if you have multiple kids.
The maximum credit you can claim with one child is $3,461 for 2018, compared with $519 if you had no kids. However, you won't be eligible for this credit at all if you have more than $3,500 in investment income.
The good news is that the credit is fully refundable, so even if your federal tax bill is lower than the amount of your credit, the government will send you money back.
You can claim a tax break for child care
The child and dependent care credit was left intact by tax reform, so you can claim this tax break in 2017 and in 2018.
The value of this credit varies based on income. If your taxable income is $15,000 or less, you can claim a tax credit equal to 35% of your child care costs. As your income rises, the percentage of child care costs you can claim falls. With an income of $43,000 or above, you're allowed to claim a credit of just 20% of child care expenditures.
The total amount of care costs you can claim is capped at $3,000 for a single child and $6,000 for two or more kids. This means no matter how much you actually pay for day care, you can't claim a tax credit for more than $3,000 or $6,000.
You cannot claim a personal exemption for your baby anymore
The Tax Cuts and Jobs Act did not boost parents' tax breaks across the board. In 2017, parents got to claim a $4,050 personal exemption for their new baby -- and for older kids, too -- because the baby counted as a dependent. However, personal exemptions disappeared with tax reform.
If you had your baby in 2017 or earlier, then when you file in April 2018, that will be your last chance ever to get that $4,050 deduction. If you haven't filed your taxes for 2017 yet, be sure to take advantage of it!
Be sure to claim your tax credits
While life as a new parent is busy and exciting, be sure to take the time to find out whether you're eligible for these credits and to claim them if you are. You can always use the extra cash to start a college fund, because it's never too early to start saving!
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