Had a Baby in 2014? What You Should Know About Taxes
Few changes are more wonderful — or important — than becoming a new parent. If you had a baby in 2014, your new addition can affect your 2014 tax return in several ways.
Know Your Tax Credits
New parents may qualify for a variety of tax credits, including the following.
The Child Tax Credit enables you to deduct up to $1,000 from your tax bill for every child under the age of 17, according to the Internal Revenue Service (IRS). To qualify, the child must be a U.S. citizen or resident and you must claim the child as a dependent on your taxes. This credit is phased out for high income earners, starting at $110,000 for married couples filing jointly and $75,000 for heads of household, says TurboTax.
The Earned Income Tax Credit (EITC) is available to lower- and middle-income families, says the IRS. The EITC can offer tax credits of up to $3,305 for one qualifying child. The precise amount of the credit varies, based on your household income and number of children. Married couples with one child must earn less than $43,941 to receive the credit; singles with one child must earn less than $38,511.
The Child and Dependent Care Credit enables working parents who pay for childcare expenses to claim a credit of $600 to $1,050 for one child under age 13, says TurboTax. The precise amount of your credit again varies by income. Check out more information on the IRS’ page, “Ten Things to Know About the Child and Dependent Care Credit.”
The Adoption Credit grants adoptive parents a tax credit of up to $13,190 per adopted child, according to the IRS. The precise amount varies by your income, but is phased out beginning at $197,880. TurboTax notes that if you adopt a child with special needs, you’re eligible to take the full $13,190 deduction, even if your actual adoption expenses were lower. Eligible adoption expenses include reasonable adoption fees, court or legal fees, and travel costs.
Remember These Tax Provisions
In addition to the common tax credits listed above, some lesser-known provisions may also affect you. Consider the following:
The Nanny Tax. TurboTax notes that families who paid a nanny or caregiver directly (not through an agency) more than $1,900 in 2014, are responsible for paying Social Security, Medicare and unemployment taxes for their caregiver, and reporting the wages to them and the IRS via form W-2.
No 529 contribution deductions. It’s a common misunderstanding that contributions to 529 college savings plans can reduce your taxable income. While 529s can be excellent college savings tools, the IRS notes that contributions are not tax deductible. The benefits will come when your baby is all grown up, and the plan’s earnings and distributions can be used free of federal and, typically, state taxes.
FSA and HSA contributions reduce taxable income. Contributions to flexible spending accounts (FSAs) and health spending accounts (HSAs) do reduce your taxable income, since contributions are typically made on a pre-tax basis, says the IRS. FSAs and HSAs can be used to cover your child’s qualifying health expenses while reducing your taxable income.
A new baby is a great joy — and a big new financial responsibility. Consult with your tax adviser or financial professional to better understand how your little one might affect your tax returns this year.
Please note that Allstate Life Insurance Company or its agents and representatives cannot give legal or tax advice. The brief discussion of taxes on this page may not be complete or current. The laws and regulations are complex and subject to change. For complete details consult your attorney or tax advisor.