Dependent Exemptions

Regardless of when your child is born during the year, you will be able to file for an extra personal exemption on that year’s tax return. Each personal exemption reduces your taxable income. To claim it exemption, you must get a Social Security number for your child. Do this as soon as possible after the child’s birth. You can apply at any Social Security.

Tax Credits

Having a child may qualify you for certain tax credits. You get to subtract these credits from the taxes you owe. If they are large enough, they may reduce the amount of tax due to less than you had deducted from your pay through federal withholding. When the amount you already paid through federal withholding is more than the total income tax you owe, you will receive a refund.

Here are tax credits you may be eligible for as a parent.

Child Tax Credit. With this credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.

A qualifying child is someone who meets these criteria:⁴

• Is under age 17

• Is your son, daughter, adopted child, stepchild or eligible foster child, sibling, or stepsibling or a descendant of any of these individuals

• Is a U.S. citizen or resident alien

• that some exceptions to this criteria exist

Earned Income Tax Credit. Also known as the Earned Income Credit (EIC), this is a credit for low-income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of Social Security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.⁵

Dependent Care Credit. If you (and/or your spouse) work, are looking for work, or go to school and you pay someone to care for dependents (a child or elderly parent claimed as a dependent on your federal income return), you may be entitled to a Dependent Care Credit in addition to a Child Tax Credit.⁶

To claim this credit, you must pay someone whom you do not claim as a dependent to provide the care.

This person must provide you with a taxpayer ID number or a Social Security number. If you use pre-tax dollars from you employer-sponsored Dependent Care Flexible Spending Account to pay these expenses, you cannot use the pre-tax dollars you paid to figure the credit.

The amount of any Dependent Care Credit is figured as a percentage of the amount you paid for dependent care and that percentage is based on your income. To claim this credit, you must file IRS Form 244.

Flexible Spending Accounts

Employer-sponsored Flexible Spending Accounts (FSAs) allow you to pay for dependent care and medical costs with pre-tax dollars. The amount you contribute to your account is deducted from your annual earnings before being reported on your W-2 Form at the end of the year. Result: Your taxable income is reduced by the amount you contributed to your FSA.

How do FSAs work? Your total annual contribution is divided by the number of paychecks you receive and is deducted evenly from each of your paychecks. You pay bills out of pocket, then submit them according to your employer’s reimbursement instructions. Most employers allow you to submit bills up to the maximum annual contribution even if the full amount has not yet been deducted from your pay or deposited in your FSA. Drawbacks? You lose any money left in the account at the end of the year.

⁴ IRS Tax Tip 2007-45
⁵IRS EIC page
⁶IRS Topic 602

Dependent Exemptions

Regardless of when your child is born during the year, you will be able to file for an extra personal exemption on that year’s tax return. Each personal exemption reduces your taxable income. To claim it exemption, you must get a Social Security number for your child. Do this as soon as possible after the child’s birth. You can apply at any Social Security.

Tax Credits

Having a child may qualify you for certain tax credits. You get to subtract these credits from the taxes you owe. If they are large enough, they may reduce the amount of tax due to less than you had deducted from your pay through federal withholding. When the amount you already paid through federal withholding is more than the total income tax you owe, you will receive a refund.

Here are tax credits you may be eligible for as a parent.

Child Tax Credit. With this credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.

A qualifying child is someone who meets these criteria:⁴

• Is under age 17

• Is your son, daughter, adopted child, stepchild or eligible foster child, sibling, or stepsibling or a descendant of any of these individuals

• Is a U.S. citizen or resident alien

• that some exceptions to this criteria exist

Earned Income Tax Credit. Also known as the Earned Income Credit (EIC), this is a credit for low-income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of Social Security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.⁵

Dependent Care Credit. If you (and/or your spouse) work, are looking for work, or go to school and you pay someone to care for dependents (a child or elderly parent claimed as a dependent on your federal income return), you may be entitled to a Dependent Care Credit in addition to a Child Tax Credit.⁶

To claim this credit, you must pay someone whom you do not claim as a dependent to provide the care.

This person must provide you with a taxpayer ID number or a Social Security number. If you use pre-tax dollars from you employer-sponsored Dependent Care Flexible Spending Account to pay these expenses, you cannot use the pre-tax dollars you paid to figure the credit.

The amount of any Dependent Care Credit is figured as a percentage of the amount you paid for dependent care and that percentage is based on your income. To claim this credit, you must file IRS Form 244.

Flexible Spending Accounts

Employer-sponsored Flexible Spending Accounts (FSAs) allow you to pay for dependent care and medical costs with pre-tax dollars. The amount you contribute to your account is deducted from your annual earnings before being reported on your W-2 Form at the end of the year. Result: Your taxable income is reduced by the amount you contributed to your FSA.

How do FSAs work? Your total annual contribution is divided by the number of paychecks you receive and is deducted evenly from each of your paychecks. You pay bills out of pocket, then submit them according to your employer’s reimbursement instructions. Most employers allow you to submit bills up to the maximum annual contribution even if the full amount has not yet been deducted from your pay or deposited in your FSA. Drawbacks? You lose any money left in the account at the end of the year.

⁴ IRS Tax Tip 2007-45
⁵IRS EIC page
⁶IRS Topic 602