Those gift packages handed out to the first child born each New Year's Day sure are nice. But if you're hoping your baby might be the recipient of such goodies in early 2012, you might want to change your timing expectations.
If your son or daughter enters your life before the ball drops in Times Square, the the new addition will provide you something even better: substantial savings on your 2011 tax return.
The full year tax bonus comes because tax law allows parents to claim child-related tax breaks no matter how early or late in the year a child is born. The rule also applies to adoptions.
Here's how your year-end bundle of joy can help reduce your taxes.
An added tax exemption: You can claim a personal tax exemption on your return for yourself, your spouse and any dependents.
An exemption is a dollar amount, generally adjusted each year for inflation, that you subtract from your adjusted gross income. This will get you a smaller taxable income amount, which usually means a smaller tax bill.
For 2011 taxes, the personal exemption is $3,700 per person. So by coming into the world on Dec. 31, your son or daughter provides you with an extra $3,700 to subtract from your AGI next filing season.
That's a $1,036 tax saving if you're in the 28 percent tax bracket. Remember that when the kid's old enough to appreciate birthdays.
Child tax credit: This is one of the easiest tax credits to claim. You list your child's name and Social Security Number on the front of your 1040 or 1040A and on the form's back page, you get to enter $1,000 on the credit line.
OK, the credit is phased out if you make over a certain amount. To figure your reduced credit amount you'll need to fill out the child tax credit's worksheet, found in IRS Publication 972, your tax return's instruction booklet or your tax preparation software package, if you make:
- $110,000 and are married and filing a joint return,
- $75,000 and file as head of household, single or qualifying widow or widower, or
- $55,000 and are married but filing a separate return.
And while this a tax credit, meaning it can help reduce your tax bill dollar for dollar, it's not refundable. If you claim the $1,000 child tax credit, but only owe Uncle Sam $800, you forfeit the excess $200.
Some taxpayers are able to claim the Additional Child Tax Credit. This tax break is refundable, doing what that description says, getting you back money from the IRS even if you don't owe anything.
To claim the Additional Child Tax Credit, you'll also have to fill out Form 8812.
Earned Income Tax Credit: This tax break is available to taxpayers whose jobs don't pay that much money. It is a refundable tax credit that was created to help offset lower and moderate income workers' Social Security taxes.
While childless workers can qualify for the Earned Income Tax Credit, or EITC, the tax benefit provides a larger credit to those with children.
On 2011 taxes, qualifying parents with one child can receive an EITC of up to $3,094. Two children could net eligible EITC recipients up to $5,112. And three or more children could be worth up to $5,751 in EITC credit for the 2011 tax year.
The income limits depend on your tax filing status, but if you made less than $49,078 in 2011 check out the IRS' online EITC Assistant to see if you and your new, larger family qualify for this tax credit.
If you're expecting your child today, here's hoping it's a safe and easy delivery.
And if the youngster arrives today, enjoy your 2011 tax benefits!
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Kay
Debbie, I knew that there’s one-day shifting of kids’ birthdays for kiddie tax calculation purposes. Jan. 1 birthdates also affect filing requirements. These situations are discussed in my “see also” link “The January effect on your taxes.” But I can’t find anything allowing a child born on Jan. 1 being allowed (or rather, allowing his/her parents) the tax benefits for the preceding year. Do you have the cite? Thanks.
Lisa
I was actually due 1/14/65, but the doctor wanted to induce my mom 2 weeks early. He gave her the choice of 12/31/64 or 1/1/65. She picked 12/31/64, figuring a tax deduction for a child who only spent less than 12 hours in 1964 (I was born at 12:40 PM) would score a higher “return” than all the gifts presented to the 1965 New Year’s baby!