When you add a member to your family, you also add a tax credit. Although you can’t claim the baby before it’s born, the cutoff for claiming a child is 11:59 p.m. on Dec. 31. If your baby is born up until the last minute, you can claim the child during that tax year. However, once the clock ticks over to 12 a.m. on Jan. 1, your newborn is officially a dependent for the new tax year.
You can only claim a baby that was born between 12 a.m. on Jan. 1 and 11:59 p.m. on Dec. 31 on this year’s taxes.
Claiming a Newborn on Taxes
If your due date is January, you’re understandably anxious. In addition to the excitement of a new addition to your family, you’re likely wondering if the baby could be born just a little early to give you a tax savings for the current year. However, you likely already know you can’t claim a baby that hasn’t been born yet, so that means unless the child arrives early, you’ll have to wait.
If your baby won’t be born until January, though, there are still some things you can do this year to prepare for next year’s taxes. You’ll keep your same filing status for this year, but you can take a look at your withholdings and adjust how much you’re having taken out of your paycheck. If you’re married and filing jointly, you should work with your spouse to make sure together you’re having the right amount held out to cover you at tax time. With new tax brackets and an upcoming dependent, you likely will want to have less taken out of each check, which will give you a little more money for all the diapers and onesies you’re going to be buying.
Understanding Your Withholdings
In response to the tax changes enacted by the Tax Cuts and Jobs Act, the government provided new withholding tables to employers. For a married person being paid between $1,177 and $3,421 biweekly, for instance, the employer is instructed to withhold $73.30 plus 12 percent of everything over $1,177. Compare this to the 2017 withholding tables, when a married person’s biweekly paycheck of $1,050 to $3,252 would have had $71.70 plus 15 percent of any amount over $1,050. If you’re making $2,000 biweekly, that means you’ll have $170.26 taken out now versus $214.20 per paycheck taken out in 2017.
Why the difference? The new tax laws are designed to help taxpayers, including an increase in the standard deduction from $6,350 in 2017 to $12,000 in 2018 for single taxpayers and from $12,700 to $24,000 for married taxpayers filing jointly. The tax brackets have also changed in favor of taxpayers, so employers have been instructed to reduce withholdings accordingly. However, since individual situations can vary, some experts have expressed concern that employers may not be holding enough out, which will result in a tax bill for some in April. For that reason, it’s important that you use the IRS’s calculator to check your own numbers.
When you start a new job, you fill out a Form W-4 to adjust the money your employer withholds from your check each week. If you’re having $200 per paycheck taken out, for instance, at tax time you may find that’s too much if you have one or more dependents. That’s because when you file your taxes, you’ll enjoy tax credits based on factors like how many children you have living with you at least half the year. So, on your W-4, you’ll stipulate the number of dependents in the form of “allowances.” The more allowances you claim, the less money will be taken out of each paycheck.
To determine your withholdings, W-4 includes a Personal Allowances Worksheet. Here, you’ll enter on line F the number of dependents the IRS instructs you to claim, based on your income. If your total income for the year will be less than $69,801, or $101,401 if married filing jointly, you’ll enter one credit for other dependents. The worksheet is designed to guide you so that you have just the right amount taken out throughout the year, depending on your situation and current tax laws.
Tax Credits for Dependents
Until 2018, your new child would have been worth $4,150, thanks to the personal and dependent exemptions allowed on taxes. Unfortunately, that deduction has gone away. That’s the bad news. The good news is that the standard deduction is now $12,000 and the tax brackets have likely improved in your favor. Although there is no dedicated newborn tax credit, there are credits specific to children that you’ll need to know about with a little one on the way.
Starting in the tax year your baby arrives, you will get a $2,000 tax credit for each child under the age of 17 in your household. Up to $1,400 of that is a refundable tax credit, which means it comes back to you even if you don’t owe any tax. If you meet the income requirements, you’ll also be eligible for the earned income tax credit, which offers $3,461 for one qualifying child if your income is less than $40,320. If you have two children, you’ll get $5,716 if your income falls below $45,802. If you are married filing jointly, those income limits increase to $46,010 for one child and $51,492 for two. For unmarried parents, you may also qualify to file as head of household, which gives you a higher standard deduction and a lower tax rate.
Tax Savings for Baby
In addition to checking your withholdings, another thing you can do in preparation for your baby’s arrival is to take advantage of any pre-tax plans your employer offers. A flexible spending account puts money into a fund before taxes are taken out to save for future expenses. A dependent care FSA lets you set money aside to pay for daycare, summer day camp and babysitting and nanny expenses. You’ll have to enroll in your FSA during the open enrollment period, which falls between mid-November and mid-December. If you miss the enrollment period, you’ll have to wait another year, so you’ll need to check into it before your baby is born to have it in place in January.
While you’re preparing financially for your baby’s arrival, you’ll also want to check into a 529 college savings plan. You’ll put after-tax money in, but it will grow tax-free over the years until it’s time for your child to go to college. At that point, you’ll be able to use the money to pay for school-related expenses without incurring a tax burden.
Children of Parents Not Living Together
In many cases, a baby’s parents do not live in the same house but share custody of the child. In that case, parents need to know how to claim a dependent when a child only lives with them part of the year. The answer depends on the custody arrangement specific to that couple. If both parents have joint legal and physical custody, it can get a little tricky. The general IRS rule is that the custodial parent gets to claim the child every year. The IRS defines the custodial parent as the one with whom the child spent the most nights during the tax year. So, if the father sees the child each Wednesday night and every other weekend, the mother will be considered the custodial parent for tax purposes.
It’s important to note that these particular tax rules aren’t set in stone. If the custodial parent releases a claim to exemption, the non-custodial parent may claim the child as a deduction in that tax year, as well as any child tax credit. However, this doesn’t apply to the earned income tax credit, since the rule attached to that credit is that the child must live in the claiming parent’s home for at least half the year.
Exceptions to the Residency Test
Although a child is required to live with you at least half the year in order for you to claim them, this doesn’t apply to a child that is born during the tax year. Even if the child is born on Dec. 31, you can claim him during that tax year. The IRS also makes exceptions for children who are away at school, live with a parent in a homeless shelter or are detained in a juvenile facility. Children who are absent due to serving in the military are also exempted from the requirement.
If a child dies or is kidnapped at some point during the year, parents can still claim the child as a dependent and get all tax credits, even if that child wasn’t with the parent for more than half the year. This treatment continues every year until a kidnapped child is found, has been determined to be dead or reaches the age of 18.
Navigating Tiebreaker Rules
Things can get complicated with parenthood today. In some cases, one or both parents continue to live with someone else, like a grandparent, after the baby is born. When that happens, there can be confusion as to whom should claim the child at tax time. When that comes around, the IRS lays out guidance for families to help decide who can claim the child, known as tiebreaker rules. Preference goes to the parent or parents, depending on whether they file a joint return or keep things separate. If they file separately, the IRS will expect the parent who lived with the child the majority of the year to claim that child. If both parents lived with the child equally, preference goes to the parent with the higher adjusted gross income.
If, however, the child lives with a grandparent or other relative for more than half the year without the parent present, things shift quite a bit. At that point, the child would meet the residency test for the grandparent or other relative to claim her as a dependent. If multiple wage-earning relatives live with the child, the IRS would go by the relative with the highest adjusted gross income.
Dependents Having Dependents
In some cases, a parent is still being claimed as a dependent on someone else’s tax return. If you’re that dependent, once you have a child, you’ll need to make a decision. You cannot claim your child as a dependent when you’re being claimed on someone else’s tax return. If you make above a minimum income during the tax year, you may be required to file a tax return and claim your child as a dependent. If you’re single and under 65, that minimum is $10,400. You also can’t file a joint tax return if you’re claimed as a dependent on someone else’s tax return.
If your income falls below the minimum and you’re claimed as a dependent on someone else’s tax return, that person will be able to claim you and your child as a dependent. You don’t have to live with the person claiming you as a dependent as long as you meet the other requirements of being a qualifying relative. However, you’ll be limited on the amount of income you can earn to remain a dependent.
- Romper: How Does Having A Child Affect Your Taxes? Here's What You Need To Know About Your "Bundle Of Credits"
- IRS: Early Release Copies of the 2018 Percentage Method Tables for Income Tax Withholding
- IRS: (Circular E), Employer's Tax Guide
- Forbes: IRS Announces 2017 Tax Rates, Standard Deductions, Exemption Amounts And More
- Forbes: New: IRS Announces 2018 Tax Rates, Standard Deductions, Exemption Amounts And More
- CNN: Is your paycheck being taxed enough? Check the new IRS calculator
- IRS: Form W-4 (2018)
- Market Watch: Have kids? 5 ways the new tax law affects you
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- FSAFeds: Dependent Care FSA
- FSAFeds: Open Season
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- LegalBeagle: Tax Filing Rights for Joint Custody
- EITC: Divorced and Separated Parents
- IRS: Exemptions, Standard Deduction, and Filing Information
- IRS: Table 2: Dependency Exemption for Qualifying Relative
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.