A new baby will undoubtedly impact your life and your pockets in many significant ways. However, your little one's arrival can also trigger tax changes in the form of credits, deductions, exemptions and allowances.

Delivering a new baby also delivers a $1,000 child tax credit, and the full credit is received regardless of which month the baby was born in. As long as the child is your dependent, you can receive this credit every year until he or she turns 17. This tax credit gradually fades for those with higher incomes. For single and head of household filers, the credit begins phasing out above $75,000, and for joint returns, the phase out begins at $110,000. (Learn more in Budgeting For A New Baby.)

Child care can be pricey, but the IRS offers some relief in the form of a child care credit. You can earn a credit ranging from $600 to $1,050 if you (1) pay for child care in order to work and (2) earn taxable income. The credit doubles to between $1,200 and $2,100 if you are paying for child care for two or more children under 13 years of age.

You can claim up to $3,000 in child care expenses for one child - $6,000 for two or more. Your credit will be based on your income and the cost of your child care expenses. (If you have some questions about how to make use of these credits, check out our FAQ: How can I use a child tax credit?)

One important note: If you hire a nanny and pay more than $1,700 per year, the IRS may view you as an employer. Social security, Medicare and unemployment taxes come along with that title!

Exemptions: Add a New Dependent
A new baby claimed as a dependent will garner you a $3,650 exemption. Just like the child tax credit, the full exemption will apply regardless of which month the child was born in. The exemption is reduced for individuals with higher income, but will not drop below $2,433.

Withholding: Change Your Allowances
Your new little dependent can bring tax breaks each year, but he or she can also help you take home a little more money each pay period. You can reduce the amount of taxes withheld from your paycheck by filing a new W-4 with your employer to claim one additional withholding allowance.

Deductions: Change Your Filing Status
If you are single, you may be able to change your filing status from "single" to "head of household." In order to file as a head of household, you must pay over half the cost of providing a home for your new baby. The head of household status also offers a larger standard deduction and different tax brackets which could work to your advantage.

Additional Credits: Earned income tax credit (EITC)
The EITC is a tax credit for low-income workers. Depending upon your circumstance, the EITC can reduce your tax burden or result in a refund. The income limits to qualify for the EITC depend on your filing status and/or how many children you have.

2009 EIC Income Limit Joint-Filers Single-Filers
No children $18,440 $13,440
1 child $40,463 $35,463
2 children $45,295 $40,295
3 or more children $48,279 $43,279
Source: Turbo Tax

An Alternative: Child Care Reimbursement Account
Your employer may offer a child care reimbursement account through a Flex Plan. Flex Plans allow you to direct up to $5,000 of your salary each year into a special account that you can use for child care expenses. This money is not subject to federal or state income taxes, and also escapes Social Security and Medicare taxes.

You cannot use both the Flex Plan and the child care tax credit for the same set of expenses, so run the numbers to determine which option is most tax-friendly. However, if you have more than one child, the child care credit can be claimed against expenses up to $6,000. So if your expenses exceed the $5,000 Flex Plan limit, you could qualify to claim the child care credit on the remaining $1,000.

There will be much to do as soon as your little one arrives, and contemplating your new tax situation may not be the first thing on your mind. In order to take advantage of any applicable tax benefits, you need to add one extremely important task: get your child a Social Security number. To avoid any future setbacks, request a Social Security card at the same time you apply for a birth certificate. (Learn more in Tax Credits You Shouldn't Miss.)

Related Articles
  1. Taxes

    Tax Breaks For Volunteering

    Your volunteer ventures could earn you some welcome tax deductions, along with the satisfaction of helping others.
  2. Taxes

    Six Ways Your Tax Preparer Knows You’re Lying

    Cheating on your taxes is asking for trouble. You might get away with it, but you’re playing with fire and likely to get burned.
  3. Taxes

    How & Where to File Form 1040 (And Which Version)

    All taxpayers need to know three things when filing a 1040: which form to use, how to file and where to file. After reading this, you'll know all three.
  4. Savings

    Should You Look at 529 Plans Outside Your State?

    529 savings plans are not restricted by geography. So if your in-state offering has high fees or poor investment choices, look elsewhere.
  5. Taxes

    The Purpose Of The W-9 Form

    The W-9 form provides key data your clients need if you're an independent contractor. Just be sure you're not really an employee who should fill out a W-4.
  6. Retirement

    Pros and Cons of Deferred Compensation Plans

    Learn about the pros and cons of non-qualified deferred compensation (NQDC) plans, including the flexibility of non-ERISA plans and the potential for forfeiture.
  7. Taxes

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
  8. Stock Analysis

    The Biggest Risks of Investing in Sears Stock

    Learn about the factors that have led to Sears Holdings' underperformance the past several years and where the ailing retailer could be heading in the future.
  9. Stock Analysis

    4 Key Indicators That Move The Markets

    Educated investors need to keep their finger on the pulse of the economy, and watching certain indicators is a good way to do that.
  10. Savings

    Craft Beer Clubs – Bargain or Not?

    If you're an aficionado of artisanal brews (or would like to be), a beer club can be a palate-pleasing, albeit pricey, way to expand your hops horizon.
  1. Do tax brackets include Social Security?

    A portion of your Social Security benefits may be subject to federal taxation using tax brackets. Your tax bracket is determined ... Read Full Answer >>
  2. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
  3. Do 401k contributions reduce AGI and/or MAGI?

    Traditional 401(k) contributions effectively reduce both adjusted gross income (AGI) and modified adjusted gross income (MAGI). ... Read Full Answer >>
  4. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
  5. Are Cafeteria plans subject to FICA, ERISA or FUTA?

    Cafeteria plans are employer-sponsored benefit plans that provide both taxable and nontaxable, or qualified, benefit options ... Read Full Answer >>
  6. Are IRS audits random?

    While the U.S. Internal Revenue Service (IRS) conducts some of its tax audits using random selection based on a statistical ... Read Full Answer >>

You May Also Like

Trading Center