While it may be the first baby of the new year who gets the headlines, the babies born during the final days of the year may pay off the most – at least when it comes to taxes. Catherine Martin, senior tax research analyst at The Tax Institute at H&R Block points out that even babies just minutes old as the clock strikes midnight on December 31 qualify their parents for the child tax credit, a tax benefit worth up to $1,000 per qualifying child for 2017.
“Parenthood comes with surprises, and taxes are no exception. While there are multiple tax benefits for parents, changes are ahead for these tax benefits,” said Martin. “Tax reform legislation increases some benefits, eliminates others, and creates new ones, so it’s important for families to look at their specific situation to know how they will be impacted.”
Child tax credit set to double in 2018
The maximum child tax credit (CTC) is $1,000 (based on income and filing status) for each qualifying child under 17 in 2017. Because this tax credit can be refundable, even taxpayers who do not owe taxes are eligible if they have earned income over $3,000 in 2017.
“Even if the baby is born just minutes before 2018, the parents may still be able to get the full child tax credit for 2017,” said Martin. “They will have more good news in 2018, when that credit doubles to $2,000.”
Earned income tax credit remains the same
Depending on their income and how many children they have, low-income workers may be eligible for the earned income tax credit (EITC) of about $500 to over $6,000. The EITC, a valuable credit for millions of families, will not change under the tax reform legislation.
“Because eligibility for the EITC can fluctuate based on financial, marital and parental changes, you can be ineligible one year and eligible the next,” said Martin. “It is important to check each year if you qualify for the EITC. Just because you did not qualify last year does not mean you will not this year, especially if your family grew.”
Dependent exemption eliminated after 2017
The dependency exemption allows taxpayers to reduce their taxable income by more than $4,000 for every dependent on their tax return. This benefit allows a family of four to reduce their taxable income by more than $16,000.
While this benefit is eliminated in 2018, Martin suggests parents look at their entire financial picture before coming to any conclusions.
“Even though you’re going to lose your dependency exemptions in 2018, you might benefit from the larger child tax credit and a lower tax rate. It’s important to look at your specific situation to determine how you will be impacted,” said Martin.
Social Security numbers necessary for many tax benefits
Babies are not required to have Social Security numbers, but without them they cannot be claimed as dependents on tax returns. Social Security numbers also are required for the EITC and will be required for the CTC beginning in 2018.
Understanding how having children and other major life events impact taxes can help parents with their tax planning. For more information about tax breaks for parents, contact a local H&R Block tax professional. To find the nearest H&R Block office, visit www.hrblock.com or call 1-800-HRBLOCK.