Welcoming your first child brings plenty of changes, including some that affect your taxes. You may become eligible for tax benefits you’ve never claimed before, and you may need to reconsider your filing status and income tax withholding. Careful planning is essential. Here’s what you need to know.
Explore Tax Credits for Parents
One of the first tax benefits to consider is the Child Tax Credit. It can reduce your federal income tax liability if you have a qualifying child. Eligibility depends on several requirements, including your child’s age, relationship to you, residency and dependent status.
However, income thresholds may reduce or eliminate the credit. Even if you don’t qualify for the full credit, you might still be eligible for a partial benefit.
If you need to pay for child care so you can work or look for work, you may qualify for the Child and Dependent Care Credit. The credit amount depends on factors such as your income and qualifying care expenses. Keep records of payments and information about care providers to support the credit when preparing your tax return.
If you have earned income and meet certain income limits, you may qualify for the Earned Income Tax Credit (EITC). Taxpayers often overlook the EITC. Eligibility for the EITC and the credit amount depend on your income, filing status, number of qualifying children and other requirements.
Review Your Income Tax Withholding
Becoming a parent may change the amount of federal income tax you expect to owe. For example, becoming eligible for the Child Tax Credit may reduce the amount of federal income tax that needs to be withheld from your paycheck. So, updating your Form W-4, “Employee’s Withholding Certificate,” after having a child can potentially maximize your take-home pay during the year.
The IRS Tax Withholding Estimator on IRS.gov can help you determine whether an adjustment may be appropriate.
Consider Your Filing Status
Having your first child doesn’t automatically change your filing status, but it may affect the status for which you qualify. For example, if you’re unmarried and meet the applicable requirements, you may be eligible to file as head of household rather than single.
Your filing status is important because it can affect your tax rates, standard deduction and eligibility for certain tax benefits. Your marital status at year end and your household circumstances during the year generally determine which filing statuses are available to you.
Seek Guidance
Your first child introduces tax considerations you may not have encountered before. Reviewing available tax benefits, your withholding and your filing status early can help you avoid missed opportunities and surprises at tax time. Because eligibility depends on your individual circumstances and tax rules can change, a tax advisor can help you understand how becoming a parent may affect your taxes.