New parents? Here's a guide to filing taxes with a new baby in the house.
Congratulations! If you had a baby in 2020, you not only made it through the pandemic with a newborn but you also have more tax deductions and credits available for your taxes. Taxes for the year 2020 must be electronically filed or postmarked by May 17, 2021. If you have other kids already, you know there are a host of things to know when filing taxes as a parent of children. If you added a child to your family in 2020, your 2021 taxes may be a little different.
File your taxes with ease this year
2020 was a year for the books and now that we're in the middle of tax season, navigating it can get stressful. Using a tax service like H&R Block can not only help minimize filing stress while maximizing your savings, but also help you reap that $1,100 recovery rebate credit if you added a little one to your family in 2020. The federal filing deadline has been extended to May 17, 2021, but filing today will get your money in your pocket sooner.
Here is what you need to know about filing as a new parent.
Start with a Social Security number
In order to receive the most tax benefits, your baby needs a social security number. If you do not have a Social Security number for your new child yet, you can only apply for a $500 credit if you have other children. You will need the other child's individual tax identification number or ITIN to claim the credit.
If you do have a Social Security number for your baby, there are several tax benefits you may now be eligible for.
You likely qualify for a $2000 Child Tax Credit
Your new baby may qualify you for a child tax credit of up to $2,000. This isn't just a deduction that reduces the amount of your taxable income. It's a credit toward your tax bill, dollar-for-dollar. If you don't owe $2,000 on your 2020 taxes, for example if you're already getting a refund back, you can apply this credit toward receiving an additional $1,400.
To qualify for the Child Tax Credit you must have:
- an earned income of at least $2,500 (but less than $400,000 joint returns or $200,000 on single or head of household returns)
- a child under the age of 17 with a Social Security number
You may qualify for the Earned Income Tax Credit
Now that you're a parent, it is easier to qualify for the Earned Income Tax Credit (EITC), which depends on your income, because the income limitation more than doubles for parents. For the 2020 tax year, the earned income credit ranges from $538 to $6,660 depending on your filing status and how many children you have.
Also, there are special EITC rules for the 2020 tax year because of COVID-19: You can use either your 2019 income or your 2020 income to calculate your EITC, and you can use whichever number gets you the bigger EITC. (This is also the case for the Child Tax Credit.) Ask your tax preparer to run the numbers both ways.
Again, like the Child Tax Credit, you can still get the credit even if you do not owe income tax. You could qualify for a cash refund.
Have you received $1,100 Stimulus Aid (EIP) for your baby yet?
Eligible parents who had a baby in 2020 and have not received stimulus checks for their new child yet may be able to receive up to $1,100 in extra stimulus money. This is the amount of the two stimulus checks other families received for dependents in 2020 ($500 plus $600). If you missed out on these checks earlier this year, it's because the IRS used 2019 returns to automatically send out payments. To apply, fill out the Recovery Rebate Credit form.
You qualify for a credit toward daycare or childcare expenses.
Childcare is a huge expense for most American families. To help offset those costs, there are 2020 tax credits available to parents who are working (or looking for work): The Child and Dependent Care Credit offers a credit for child care costs including babysitting, day care or a nanny's wages (even day camps later on!). For 2020, the maximum credit for a child under 13 is $1,200, and the credit amount increases for additional children.
Who is eligible? The percentage of allowable expenses decreases for higher-income earners but never disappears completely. Unlike the Child Tax Credit, this credit is not refundable. You can use it to lower your tax bill but won't get a refund on any amount left over.
Also, ask your tax preparer if your state has its own version of the credit for child care. Your state might expand eligibility, adjust the income thresholds or provide other incentives.
And going forward, don't forget about Flexible Spending Accounts. Ask your employer if they offer a FSA, which allows you to save up to $5,000 before taxes to use toward child care expenses. For example, parents in the 24% tax bracket could save $1,200 by fully funding their FSA.
You may be eligible for tax deductions on medical expenses
With a new baby, you'll have the birth itself plus lots of new doctors' appointments, possibly prescriptions and even ER visits. The good news is that if you aren't reimbursed for medical expenses through insurance, and these costs add up to 7.5 percent of your adjusted gross income, medical expenses can be used as deductions.
What qualifies? You can deduct unreimbursed expenses for preventative care, treatment, surgeries, (plus dental and vision care). If your baby needs glasses or a hearing aid, your out-of-pocket expenses for those are also deductible. Driving to your appointments? Keep track of your mileage because you can even deduct the expenses that you pay to travel for medical care, such as mileage on your car and parking fees (bus fare counts too).
How does it work? The deduction value for medical expenses varies because it changes based on your income. For 2020 returns, count up your expenses that you haven't been reimbursed for (and are included in the list above). If the total is more than 7.5% of your adjusted gross income, you can use the amount over the 7.5% as a deduction.
On a separate note, a Health Savings Account might be an option if offered through your insurance company or employer. The benefits here are simpler: You can pay into these accounts on a pre-tax basis, then use that money to fund qualified expenses for your baby.
What do unmarried parents need to do to save money on their taxes?
Families come in all sizes, but the IRS has very specific definitions about who makes up a "tax family." For the growing number of unmarried couples who are co-parenting, this means you can't both claim your new baby as a dependent (and reap the subsequent tax benefits). Instead, as a couple you will need to choose who gets to claim each child and their benefits on your tax returns. Compare results to find the best overall tax outcome for the entire family.
Filing with "head of household" status can give you better tax benefits than filing as "single" would. The head of household status has lower taxes, a larger standard deduction and higher income thresholds for some tax benefits, like the saver's credit.
You can file as head of household if you are unmarried at the end of the year and paid more than half the cost of maintaining a home for more than half the year for a qualifying child or qualifying relative for head of household purposes.
This article is in partnership with H&R Block. Thank you for supporting the brands that support Motherly and mamas.