When there is a birth of a child, or an adoption of a child, you look at ways to save money for the upbringing of such child. Here are some important methods.
Before discussing the methods, it is important to remember that you need to get a social security number for your child. For claiming any tax benefit, you need to quote the social security number for the child. If you fail to report the number, you are subject to a fine of $50 and your refund is delayed for such omission.
You can get the social security card for the newborns at the hospital when you apply his/her birth certificate. For an adopted child, you will need to apply in form SS-5 with the social security administration with necessary proof for the age and citizenship of the child.
Once you have the social security number you are set to apply for tax benefits. Here are the tips
- Getting increased tax rebate check - If your child is born or if you have adopted a child in 2008, you are entitled for an extra credit of $300 in your tax return for 2008. This is because and a rebate check is usually based on information in your 2007 tax return.
- Claiming the exemption of dependency - If you claim your child as dependent in your 2008 tax return, you can claim an extra exemption of $3500 which can directly save $875 for you on the assumption that you are in 25% tax bracket. You can claim the entire exemption amount even if the child was born or adopted on any date of the year!
- Claiming Child tax credit - The new baby coming to your family gives you a child tax credit of $1000 and it continues until your child turns 17. This tax credit is available for the total amount even though the child was born on adopted on any date of the year. This tax credit is very important as it reduces your tax burden directly by $1000.
- Claim correct filing status - If you are filing as married filing jointly, there is no change in your filing status on the birth or adoption of a child. However if you are single, you are allowed to file under the status "head of household" meaning they beat the amount of standard deduction and more beneficial tax bracket range. However, to qualify yourself as the head of household, you have to pay more than 50% of the cost of providing home for a qualified person.
- Claiming earned income credit (EIC) - If your income on the joint return for the year 2008 is below $37,000, you qualify to claim the earned income credit. This limit would have been $15,880 for a couple without children. So your eligibility increases by a substantial amount on arrival of a new baby in your family. Remember, if you have two or more children, the limit is $41,646.
- Reducing your withholding - As you are claiming an extra dependent in your family, and subsequently reducing your tax bill, you can reduce tax withholding from your paycheck. This will increase your take home pay. By taking into account the child tax credit, you can further reduce withholding on your W-4, which means extra cash for you per month.
- Claiming credit for childcare - If you are working and paying for childcare, you can claim a credit in the range of $600 to $1050 for care of one child under 13 or in the range of $1200 to $2100 for care of two or more children under the age of 13. The credit for lower income people is higher (up to 35% of qualifying cost) while it reduces for people with higher income to 20% with AGI more than $43,000.
- Claiming credit for adoption - If you adopted child, there is a tax credit available to you of $11,650. If you adopt a child with 'special needs', then you can claim the entire credit of $11,650 even though you spend less. Remember, this credit is phased out for AGI increase from $174,730 to $214,730.
The task of upbringing a child is very crucial and IRS extends its share to you.
There are all sorts of financial decisions you take in your life. You make gifts to your children; you make investments and acquire real estate. Do you really know the tax implications of these decisions, which can save you thousands of dollars?
Stop donating your money to IRS is an e-book on these little known tax secrets. It is written by Chintamani Abhyankar, a tax professional for last 25 years. Get the expert advice.
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