Congratulations on your new bundle of joy! New parents can have it rough during the transition of becoming a new parent. Not only are they dealing with lost sleep, they also face the extra cost of raising a child. At least there are a lot of potential tax breaks available to them.
Check out this list and share it with any new parents you know.
“While the new tax law got rid of personal exemptions on the federal level, many states still provide exemptions for children on their own returns.” – Ren Cicalese III, CPA, MST
Tax law changes this year not only double the size of the Child Tax Credit, they make it available to more parents than ever before. The credit increases to $2,000 from $1,000 (with $1,400 of it being refundable even if no tax is owed). Meanwhile, the eligibility phaseout threshold increases sharply to $400,000 from $110,000 for married joint filers (and to $200,000 for single taxpayers).
If you pay a nanny, babysitter, daycare or a relative to take care of your child while you and your spouse are at work, you can claim the Child and Dependent Care Credit. It’s up to $1,050 on $3,000 in expenses for one child and twice that for two or more children. The key is that you and your spouse (if you are married) must both be working, and you can’t claim expenses for overnight care.
If you have property that produces income, such as bonds, stocks, mutual funds, interest or realized capital gains, you can lower your tax by transferring a certain amount of that income to your children. Why? Your child has a lower tax rate than you do on unearned income. This works up to a certain dollar limit before “kiddie tax” rules come into play.
“The kiddie tax will kick in once a child earns more than $2,100 in unearned income for 2018. Once above that threshold, the income will be tax at graduated rates ranging from 10% to 37%.” – Ren Cicalese III, CPA, MST
“Examples of unearned income are interest, dividends, and capital gains. Unlike prior years, the kiddie tax rates are based on the brackets applicable to trusts and estates. ” – Chris Cicalese, CPA
About 135,000 children are adopted in the U.S. each year. If you are welcoming an adopted child into your family, the Adoption Credit can be claimed on up to $13,840 in expenses, such as fees, legal counsel and court costs.
There are many provisions in the tax code to help cover the high cost of education. Consider establishing 529 college savings programs for your new addition. While contributions are made with after-tax dollars, any investment gains are tax-free as long as they’re used to pay qualified education expenses. The tax reform passed last year now also allows you to use these funds to pay private elementary and secondary school tuition as well as college.
“Depending on the state you live in, contributions to a 529 plan may be tax deductible. For example, Pennsylvania allows for a deduction for contributions to a 529 plan.” – Ren Cicalese III, CPA, MST
Protect the financial future of your family. Contact an Alloy Silverstein accountant and advisor for tax planning advice.
The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information or for assistance with any of your tax or business concerns, contact our office at 856.667.4100.
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