Just had a baby? Congratulations on your brand new child tax exemption! Of course, having a tax exemption isn’t the only reason to have a child, but with all of your new baby-related expenses such as diapers, food, furniture, and child care, it certainly doesn’t hurt to defray costs by taking advantage of the tax benefits available to you as a new parent.
The Dependency Exemption is the standard deduction for any child who receives more than 50 percent of his or her support from you. The amount varies each year, but in 2009, the exemption is expected to be about $3,650.
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. Those extra tax savings can really add up.
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
This 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. It’s 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, don’t forget to adjust the tax withholding on your paycheck to reflect the new addition to your family!