Did You Have A Child in 2009?
Congratulations on the new addition to your family. See the bullets below
for important information on how your new child will affect your tax return:
Social Security Number
For Your Child
It is critical to get a Social Security Number for your child if you want to receive
tax benefits. You will need to claim your child as a dependent on your tax return,
and to do this, you will need a Social Security Number for your child. If you fail
to report the Social Security Number for each dependent, you may be subject to a
$50 fine and your refund may be delayed until things are straightened out.
You can request a Social Security Card at the same time you apply for a birth certificate.
Otherwise, you will need to file a Form SS-5 with the Social Security Administration
and provide proof of the child's age, identity, and U.S. citizenship.
Dependency Exemption
Claiming your son or daughter as a dependent will protect $3,500 of your income
from being taxed, saving you $950 if you are in the 25% bracket. You get the full
year's exemption regardless of when during the year your child was born. Regardless
of your income, if you are hit by the alternative minimum tax, exemptions lose all
of their tax-saving value.
Modify Your Withholding
Since you will be claiming an extra dependent and your tax bill will be reduced,
you can cut back on tax withholding from your paychecks. You need to file a new
W-4 form with your employer to claim an additional withholding allowance. You can
also take the child credit into account on your W-4, to reduce withholding even
more.
Filing status
If you are single, having a child may allow you to file as a head of household rather
than using the single filing status. This will give you a bigger standard deduction
and more advantageous tax brackets. To qualify as a head of household, you must
pay more than half the cost of providing a home for a qualifying person.
Childcare Reimbursement Account
Another way you can save on taxes when you have a child is to have a childcare reimbursement
account at your work. These accounts, sometimes called flex plans, let you move
up to $5,000 a year of your salary into a special account that you can then use
to pay child care bills. Money that you put into the account lets you avoid both
federal income and Social Security taxes, so it could easily save you more than
the value of the credit. But remember, you can't use both the reimbursement account
and the tax credit. Although you generally can only sign up for a flex account during
open season, most companies allow you to make mid-year changes in response to certain
life events such the birth or adoption of a child.
Adoption
Credit
If you have added to your family by adopting a child, there’s a tax credit
to help reimburse the cost of adoption. The credit is worth as much $11,650. Also,
if you adopt a special needs child, you can claim the full credit even if you spend
less than $11,650.
Saving For College
Time goes fast and before you know it, your child will be ready for college.
It’s a good idea to start saving early on for those college bills. Congress
has some tax incentives to help parents save. One option is a Section 529 state
education savings plan. Contributions to these plans are not deductible, but earnings
grow tax-free and payouts are tax-free if the money is used to pay qualifying college
bills. Many states give residents a state tax deduction if they invest in the state's
529 plan. You may also want to put money into a Coverdell education savings account
(ESA) for your child. You can fund up to $2,000 a year for any beneficiary. Again
there is no deduction for deposits, but earnings are tax-free if they are used to
pay for education expenses. ESA money can also be used for elementary and high school
expenses in addition to college costs.
IRAs For Children
IRAs for children advantageously utilize compound interest, making small investments,
especially when a child is young, positioned for immense growth. However, in order
to open an IRA, a person must have earned income from a job or self-employment which
is not the case with most children. You can’t use money from gifts or investments
either. As soon as your child starts earning some money—babysitting
or delivering papers, for example, or helping out in the family business—he
or she can open an IRA. The power of long-term compounding makes this a great idea.
Nanny Tax
If you hire someone to come into your home to help care for your new child, you
might be considered an employer in the eyes of the IRS and face a whole new set
of tax rules. If you hire your nanny or caregiver through an agency, the agency
may be the employer and have to take care of all the paperwork. But if you're the
employer and you pay more than $1,500 a year, you are responsible for paying Social
Security and unemployment taxes for your caregiver, and reporting the wages you
pay to the government on a W-2 form.
More details on Dependent and Child Care
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