Having a child can greatly reduce your tax burden.
Having a child is one of several life events that can substantially impact your tax situation. Unlike other life events, having a child is almost always beneficial to your tax situation, as children usually reduce the amount of tax for which you are responsible. Fortunately, it is relatively easy to understand the impact that having a child will have on your tax situation and to take advantage of the many benefits.
Tax Liability
Deductions, exemptions and credits reduce your overall tax liability. The more of these you claim on your income tax returns, the lower your tax liability becomes. Having a child adds one exemption to your return, which automatically reduces your tax liability in the amount of $3,650 per child as of 2010. In addition to the exemption you receive for your child, you may also be eligible to receive a number of tax credits including but not limited to: the Earned Income Credit (a refundable credit based on income that may provide you a refund even if you aren't responsible for paying tax); Child Tax Credit ($1,000 for each child under the age of 17 at the end of the tax year); and Additional Child Tax Credit. You may also be able to claim dependent and child care expenses for your child.
Considerations
Having a child will require that you make a few changes to your withholding amount at work. You will need to add an exemption to your W-4 form to mark the addition of your child. This added exemption will result in more money in your paycheck, as it will reduce your federal withholding.
Limits
There are income limits on some of the credits for which you may be eligible, depending upon your income. For example, the Child Tax Credit will be reduced for joint filers earning over $110,000 and single filers earning in over $75,000 as of 2010.
Warning
The Social Security Number used to claim your child on your income tax return can only be used once to claim an exemption or deduction. What this means is that if you share custody, then you will need to determine which of you will claim the child and for which years. IRS eligibility guidelines require that the taxpayer who claims the child must have provided the majority of support for the child. However, instructions on how divorced taxpayers should file are often found in the divorce decree.
Exceptions
You may actually be required to file a return for a child who inherited a trust fund for which they earn interest. Call the IRS at 1-800-829-1040 for the specific rules regarding your child's type of estate or trust fund.
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