Having a baby brings a new bundle of joy into the world, and a bundle of extra tax breaks to your tax return. Of course, the tax breaks are unlikely to completely offset the new expenses your kiddo brings to your budget, but every little bit helps when it comes to your taxes.
Typically, your child has to live with you for at least half the year for you to claim her as a dependent. However, the IRS makes a special exception for newborns: as long as the baby lived with you for at least half the time she was alive, the baby is counted as living with you for at least half the year. For example, if you have a baby in December 2012, you can claim an extra exemption for the baby when you file your 2012 tax return even though she lived with you for less than a month.
Child Tax Credit
The child tax credit reduces your tax bill by up to $1,000 for each of your kids under 17 years old that you claim as a dependent. Like the dependency rules, the child must live with you for at least half the year, but if you had a baby during the year, you meet the requirement as long as the baby lived with you for half the time he was alive. However, unlike the dependency benefits, the child tax credit has income caps. As of the 2012 tax year, your maximum credit starts dropping if your modified adjusted gross income exceeds $110,000 if you're married filing jointly, $75,000 if you're single or head of household, or $55,000 if you're married filing separately.
Having a baby isn't cheap, especially if your insurance doesn't cover all the hospital costs. If you have unreimbursed qualifying expenses, you can count them toward the medical expenses deduction. These include pregnancy tests, prenatal care, delivery and other treatments. However, you're limited to deducting only the portion of your medical expenses that exceeds 7.5 percent of your adjusted gross income in 2012 (rising to 10 percent in 2013), so if you have a large income or minimal unreimbursed expenses, you might miss out.
Child and Dependent Care Credit
Until the year your new baby turns 13, you can claim the child and dependent care credit for child-care costs paid so that you and your spouse can work or look for work. As of the 2012 tax year, you can include up to $3,000 of expenses for one child or up to $6,000 of expenses if you have two or more children. The credit equals up to 35 percent of your expenses, but that percentage drops as your adjusted gross income exceeds $15,000. It will never drop below 20 percent.
Filing Status Change
If you're married, having a baby won't change your filing status. But, if you're not, that new bundle of joy can move you from single to head of household. As long as the baby lives with you for at least half the year after birth, the newborn counts as your qualifying person. It's not a deduction, per se, but it does get you a bigger standard deduction. Even if you're itemizing, the head of household status offers larger tax brackets, so you'll pay less in taxes than if you filed as single with the same amount of income.
- Internal Revenue Service: Publication 17 -- Your Federal Income Tax
- Internal Revenue Service: Publication 502 -- Medical and Dental Expenses
- Internal Revenue Service: Ten Things to Know About the Child and Dependent Care Credit
- Internal Revenue Service: Publication 503 -- Child and Dependent Care Expenses
- Jupiterimages/Comstock/Getty Images