Take Advantage of Your Tax Options
Now that you have a baby, you're eligible for tax credits that you may not be aware of, says Fred Grant, a senior tax analyst with the computer software company TurboTax. The amount of your child tax credit depends on your filing status, your adjusted gross income, and the number of eligible children in your family.
For example, if you're married and filing jointly and your adjusted gross income is $110,000 or less, you're entitled to a tax credit of $1,000 per child. Tax credits are valuable because they reduce your tax bill dollar for dollar. If you have one qualifying child and your household income is more than $110,000 but less than $129,000, you get a portion of the full $1,000 tax credit; if you make more than $129,000 and have just one child, you're out of luck -- the tax credit phases out entirely. However, if you have more than one child, the income limits are higher. If you're single and have only one qualifying child, your adjusted gross income can be as much as $75,000 and you'll get the full credit.
If both you and your spouse work (or you're a working single parent), you can also claim tax breaks associated with childcare for kids younger than age 13. You have two options.
The first is putting money aside in a flexible spending account set up by your employer. Here's how it works. Over the course of a year, you're allowed to have up to $5,000 withheld from your paychecks on a pretax basis. So if you get paid every other week and you want to put the maximum into your account, you'd have $190 deducted from every check, before taxes. If you're in a tax bracket where 28 percent of your income is taxed, you save about $1,400 on federal taxes alone. As the money accumulates, you submit your childcare bills and are then reimbursed by the company's plan administrator. To submit a claim, you must provide the caregiver's Social Security number or tax ID number, so the daycare center or babysitter has to be on the books.
If your company doesn't offer flexible spending accounts, you can claim up to $3,000 in childcare expenses on your tax return if you have one qualifying child, and up to $6,000 if you have more than one child. Again, you have to provide your caregiver's Social Security number or tax ID number.