Saving Money

Just had a baby? Congratulations on your brand new tax exemption! Of course, having a tax exemption isnt the only reason to have a baby, but with all of your new baby-related expenses such as diapers, food, furniture, and child care, it certainly doesnt hurt to defray costs by taking advantage of the tax benefits available to you as a new parent.

First, the Dependency Exemption is the standard deduction for any child who receives more than 50% of his or her support from you. The amount varies each year, but in 2009, the exemption is expected to be about $3,650.

Then, theres the Child Tax Credit. You may be surprised to learn that a child born any time during 2008 even as late as New Year's Eve 2009 -- qualifies you to claim both a $1,000 child credit and a $3,500 dependency exemption. Originally the child tax credit was set to revert to $700 for this year, but thanks to the Working Families Tax Relief Act, passed by Congress in 2004, Congress was able to extend the deadline and keep the Child Tax Credit at $1,000 per child through 2010, providing you meet the income qualifications for your tax bracket.

The Child-Care Tax Credit is something distinct from the Child Tax Credit, and it allows you to deduct up to $3,000 worth of expenses paid in a year for one qualifying parent, or $6,000 for two or more qualifying parents. Its also called the Dependent-Care Tax Credit. To take advantage of this credit, you need to fill out Form 2441: Child and Dependent Care Expenses when you file your federal income tax.

Please note that if you have a Dependent-Care Flexible Spending Account with your employer, you cannot take advantage of the child care tax credit at the same time. Check with your human resources representatives to get details about your eligibility for this option. And while you are there, dont forget to adjust the tax withholding on your paycheck to reflect the new addition to your family!

Each personal exemption you are able to claim on your yearly tax return is the equivalent of roughly $3400. Children, parents, spouses and other qualifying dependents can allow you to adjust your withholding considerably. If one of your family members passes away over the course of a year, the tax deduction associated with your loved one is probably the last thing on your mind. However, there are several things you will need to consider about your federal income tax when you are confronted with the death of a dependent family member.

First, if your dependent dies over the course of the year, you may still claim them on your income tax for that period. There is no time limit on this stipulation; even if your dependent passes away in January, the deceased is still considered your dependent for that fiscal year.

Second, you should remember to notify Social Security when your dependent passes away. Many funeral directors voluntarily provide this information directly to the Social Security office; however, it is still legally the family's responsibility to take care of the notification. Talk to your funeral director and see if this arrangement can be made on your behalf.

And finally, even though it may be the last thing you are worried about, don't forget to speak to your employer about changing the withholding on your paycheck. You want to make sure that the tax withheld for your filing status accurately reflects the number of dependents you currently have. Since you will be able to claim your deceased dependent in the first year, it will not make much of a difference during that time. But if you forget to take care of it within that year, you could be in for a nasty surprise the second year if your withholding amount is too low.

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