Filed under: Taxes, Having a Baby
A Boost to Standard Deductions and Personal Exemptions
Having a child adds another dependent to your tax return, which can have a big impact on the taxes you pay. Those who filed as single taxpayers typically qualify as head of household, which in 2015 gives you a standard deduction of $9,250 rather than the $6,300 that childless singles receive. Moreover, regardless of whether you're married or single, having another dependent adds a personal exemption to your total, further reducing your taxable income by $4,000 in 2015. By themselves, those breaks can save hundreds or even thousands of dollars on your tax bill compared to what you paid before having a child. Single parents get the additional benefit of having more favorable tax brackets, which further reduces overall tax liability.
Bringing On the Credits
Several credits apply to families with children. The Child Tax Credit reduces your tax bill by up to $1,000 per child every year until your child turns 16. Income phaseouts beginning at $75,000 for single filers and $110,000 for joint filers reduce the credit gradually, but the credit is a rare example of a provision that can actually put money back in your pocket even if you don't owe any taxes at all.
If you adopted your child, then you can get a credit for adoption expenses of up to $13,400 in 2015. A much higher income phaseout range of $197,880 to $237,880 applies to the adoption credit, which lets you recover the costs of adoption fees, court costs, attorneys' bills, and traveling expenses to get your child.
Single taxpayers who work and two-earner families who file jointly can also claim the Child and Dependent Care Credit, which pays up to 35 percent of the first $3,000 you spend on child-care expenses for one child, or the first $6,000 for expenses for two or more children. For joint filers, both parents have to have earned income from employment or a business. The percentage of the credit ranges from 20 to 35 percent depending on how much income you have.
Finally, the Earned Income Tax Credit applies much more broadly for parents than it does for taxpayers with no children. Although the maximum credit for those with no children is just $503, those with one child can claim up to $3,359, with two-child families having a $5,548 maximum and those with three or more children seeing a maximum of $6,242.
Reducing Your Taxes With Your Child's Return
Another way parents can get tax benefits through their children is to arrange their finances to have the child generate taxable income. Because young children have no other income, their tax rates on any investment income are very low.
This strategy used to be so popular to avoid taxes that lawmakers finally had to limit its use. Now, the so-called "kiddie tax" applies to prevent parents from sheltering income under their kids' tax returns. You can still use lower tax brackets for children's returns to a limited extent, but for 2015, the most that a child can have in unearned investment income without paying federal income tax is $1,050. Another $1,050 gets taxed at the child's lower rate, but above that amount, the child is treated as paying the same rate that the parents pay on their tax return.
Your Bundle of Tax Joy
Parenthood has its joys and challenges, but financially, the tax breaks that having a child can bring make a big difference in being able to afford the added expenses of raising a family. By knowing as much as you can about tax breaks available to families, you can put yourself in the best position possible to have the IRS subsidize your child's expenses throughout their childhood.
Motley Fool contributor Dan Caplinger loves his 9-year-old daughter for many more reasons than just the tax savings. You can follow him on Twitter @DanCaplinger or on Google Plus. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
