Last week, my wife and I welcomed our second child to this world. It was a wonderful experience and no less fascinating than the first time I bore witness to such an event. Aside from all the good feelings and smiles, there are important tax implications of this birth that must be addressed. We will explore the actual and potential impacts on our federal tax liability as a result of the arrival of our little angel.
Parents of a dependent child like us are entitled to take a dependency exemption on their tax return ($4,050 for 2017). This is a direct reduction to taxable income. Cha-ching! However, this amount is subject to a phase-out for “high income” taxpayers (between $313,800 and $436,300 for Married Filing Joint). To me and my wife, this translates to about $2,025 in tax savings (assuming a 25% bracket).
Child Tax Credit/Additional Child Tax Credit:
Subject to a 7-item test, many taxpayers can get up to $1,000 per child in the form of a tax credit. Unfortunately, this credit is subject to a phase-out as well ($110,000 to $130,000). In addition, the credit is refundable if you have sufficient earned income to cover any excess portion of the credit over your tax liability. Many proud parents will get to knock a few dollars off of their tax bill.
Earned Income Tax Credit (EITC):
Certain “low income” taxpayers that had already been eligible may be able to take better advantage of the EITC by having an additional child. There are different tiers for the credit for those that have from 0 to 3 or more children so your new arrival may put you into the next tier. This will not benefit my family, but can be a significant boon for those that are eligible.
Child and Dependent Care Tax Credit/Flexible Spending Account:
Married taxpayers that both have earned income and have expenses paid to a care provider in excess of those paid by their employer for a dependent child can also receive a nonrefundable credit. There are provisions in the credit that allow for spouse that is a student, seeking employment, and/or disabled to still be eligible to take the credit. The amount of the credit is 20% to 35% of up to $3,000 (or $6,000 if you have 2 or more children) of the expenses paid, phased over $15,000 to $43,000 of income. This sounds complicated, but bear with me – assuming we will hit the $3,000 cap for each child (and we will), this credit will be worth $1,200. It may not sound like much, but I’ll take any help I can get; the cost of daycare is painful. Married taxpayers can also set aside up to $5,000 in pre-tax dollars to a flexible spending account. It is important to note that those funds must be used on qualified expenses in the same year they are set aside or they are lost forever.
Aside from adjusting to sleepless nights and sibling rivalry, we also have to consider the tax ramifications of our fourth family member. There are additional federal and state tax implications to consider, such as saving for college (hoping for scholarships… fingers crossed), student loan interest, and college tuition credits, but the latter two are down the road a ways. For now, we will just have to recognize the advantages that are available to us to help us best plan for the future. Please take this moment to appreciate the simple pleasure of sleeping through the night.
Evan Piccirillo, CPA is a Tax Supervisor in Raich Ende Malter & Co. LLP’s Long Island office. Evan specializes in high net worth individuals, as well as closely-held corporations, S-Corporations, and small businesses. Contact Evan at firstname.lastname@example.org or (516) 228-9000.