So you became a new, second, third+ parent in 2013? Congratulations! We welcomed our first child in April at a healthy 9 pounds and 11 ounces, and sometimes late at night or early in the morning between diaper changes and feedings, I would find myself wondering "just how much is this kid going to save me on my taxes?" It is a common misconception that the tax benefits of having a child outweigh the actual costs of raising said child. After accounting for diapers, wipes, food, clothes, carseats, bouncers, bumbos and boppys, the costs of raising a child year over year are higher than the tax benefits received by adding a dependent to your tax return. But, there are tax benefits to take advantage of if you have become a new parent in 2013.
Personal exemptions
The personal exemption is an automatic exemption for everyone on their Form 1040 individual income tax return. The personal exemption amount is $3,900 (for 2013) per qualifying individual. A qualifying individual is you, your spouse (if filing a joint return), and each dependent you list on page 1 of your 1040. For example, if you are married and filing jointly and have 1 dependent child, your personal exemption for 2013 is $11,700 ($3,900 x 3). Personal exemptions are deducted from adjusted gross income (AGI) to arrive at taxable income on the 1040, meaning that the personal exemption is not a reduction in tax, but is a reduction in the income that determines how much tax you pay. However, if you have a high income, you might not get full benefit of your personal exemptions due to the personal exemption limitations brought back by Congress beginning in 2013.
Child tax credit
The child tax credit is a potential credit of up to $1,000 per qualifying child. Notice that this is a credit instead of a deduction, which means that it directly reduces tax instead of reducing income. To be a qualifying child, the child must:
- be your son, daughter, foster child, brother, sister, stepchild, grandchild, niece, or nephew
- be under the age of 17 at the end of 2013
- not have provided half of their own support during 2013
- have lived with you for at least half of 2013
- be claimed as a dependent on your return
- the child cannot file a joint return for 2013
- be a US citizen, US national, or US resident alien
Married taxpayers with AGI of $110,000 or less and single taxpayers with AGI of $75,000 or less may claim the credit on Form 8812 and attach to their 1040.
Child and dependent care expenses
Taxpayers may be able to claim a credit related to expenses they paid during the year for dependent care. Qualified expenses are for household services such as a nanny, or outside services such as daycare, that were provided so the taxpayer can work or look for work. The taxpayer will need to have the name, address, and social security number or employer identification number of the care provider to claim the credit. The credit can be claimed for dependent care expenses for each child under the age of 13. The credit is up to 35% of expenses paid for care, and the credit is limited to $3,000 for one child or $6,000 for two or more. However, there are stipulations. If the taxpayer's employer paid the care provider directly on the taxpayer's behalf, the care was provided by the employer, or the expenses were paid by the taxpayer from pre-tax contributions to a flexible spending arrangement (FSA), then the credit will be limited. The credit is claimed on Form 2441.
Children are a blessing, and thanks to the credits and deductions listed above, they can also provide some marginal tax benefits.
