Tax Benefits that can be availed for a Newborn
Parenting can be expensive with a lot of new expenses getting added up to your list. Baby supplies, baby bottles, diapers, baby clothing, etc. can turn out to be quite expensive. However, if you are a parent to a newborn child then you can be able to avail certain tax advantages. These can help reduce the financial burden up to a certain extent.
Let us check out the tax benefits that can be availed for your newborn kid.
Child Tax Credit
If your child is below the age of 17 years then you would be able to claim him as a dependent and take the benefit of Child Tax Credit (CTC). For each qualifying child, the Child Tax Credit which can be claimed is up to $2,000.
If you are a single parent, the CTC value would be reduced by 5% of the AGI which would be over $200, 00 whereas it would be reduced by 5% of the AGI over $400, 00 if you are married and filing your taxes jointly.
CTC is refunded partially i.e. in case of the credit value ending up being more than the total amount of taxes that you owe to pay you would be able to receive a tax refund which would be up to $1400 of the amount remaining. This part of the credit would be known as Additional Tax Credit.
Adoption Tax Credit
If you have adopted a child in the year 2020, you would be eligible for the Adoption Tax Credit. This credit can be up to an amount of $14,300 for each child. But, the Adoption Tax Credit is non-refundable and can only be claimed if there is a federal tax bill.
The eligibility to obtain the Adoption Tax Credit would depend upon the below-mentioned criteria.
- To claim the Adoption Tax Credit, you should have adopted the child in the 2020 tax year. The adopted child should be below the age of 18 years and must be either mentally or physically unfit for taking care of his responsibilities.
- Your income should be within the limits that are needed to avail of this credit. In the year 2020, if your family has an AGI which would be less than $214,520 then the family would be able to claim the full Adoption Tax Credit. In case, the family has an AGI which lies between $214,520 and $254,520 then the family would be eligible for only Partial Credit. If a family has an AGI that would be above $254,520 then the Adoption Tax Credit cannot be claimed by the family.
Child and Dependent Care Credit
The Child and Dependent Care Credit are somewhat different from the Child Tax Credit. These are two different credits that are available for the parents of kids. This credit would help reduce your financial liabilities while you are searching for a job. This credit is around 25-35% of your expenses that are qualified. The amount which you would obtain as credit would mainly be based upon your level of income and how much has been spent on your child and dependent care. You are eligible to claim $3000 for each qualifying dependent or $6000 if there are two or more dependents.
Earned Income Tax Credit
The amount which you are eligible to receive as Earned Income Tax Credit (EITC) would depend on the number of children you are having, your tax filing status, and also your income. For the tax year 2020, the Earned Income Tax Credit can be ranging from $538 to $6660 whereas it would be ranging from $538 to $6728 for the tax year 2021.
You are eligible to calculate your EITC by using your income for the year 2019 or 2020 whichever would help in a bigger credit calculation.
The 529 plan would be helpful in saving money for your children’s education. The 529 plan would help provide tax benefits in case you are saving money for your children’s education. 529 Plan can be categorized into two categories i.e. College Savings Plan and Prepaid Tuition Plans. A College Savings Plan would act as a Roth 401(k) or Roth IRA plan in which you are investing your after-tax contribution into mutual funds. In Prepaid Tuition Plan you would prepay complete or a part of your child’s in-state education in a public college.
Funds which are saved under the 529 Plan are tax-free and are not taxed even when the amount is withdrawn for education expenses.
Adjustment with tax withholding
When you have a newborn baby, you can be able to adjust your total tax withholdings on your Form W-4. By adjusting into your withholding, you would be able to make sure that the right amount is being withheld from the amount that you would receive as your paycheck, and in turn, you have to pay fewer taxes at the time of filing your returns.
Hence, these are some of the major tax benefits which you can avail of if you are a parent.