We work with our clients as they go through a multitude of life changes. Our goal is to develop long term relationships and be more than the once-a-year accountant. One of those very enjoyable life changes is children! Our office has been flooded with 2013 babies and brand new 2014 babies this past week and we love getting to meet them. Not only do children enrich your lives, but they may be able to save significant tax dollars too.
An integral first step is to obtain a child’s social security number. Parents can apply for this at the hospital when requesting a birth certificate. The tax returns cannot be completed until each child’s social security number is present to avoid delayed refunds and possible fines. Also remember that parents can only claim an exemption for a child born or adopted in or before the tax year that is being filed. January and February 2014 babies will have to wait a whole year to provide tax benefit. However, for children born in the prior year the full exemption is taken no matter when the child was born during the year. For 2013, the exemption amount is $3,900 per individual. To put it in perspective, for a family of 3 in the 28% tax bracket that is a tax savings of $3,276!
It is also important to note that if in the past the tax returns were filed as single, the birth of a child may qualify for the head of household status. Head of household filing status provides more favorable tax brackets as well as an increased standard deduction amount. For 2013, the single taxpayer’s standard deduction is $6,100 versus $8,950 for head of household filers. For married individuals, having a child will not change your filing status. Regardless of filing status the birth or adoption of a child is also a reminder to check Federal and state withholding allowances. Depending on each individual’s situation this may result in an increase in allowances producing more take home pay each pay period. Be sure to not arbitrarily increase allowances, but use the W-4 (Federal) and NC-4 (North Carolina) worksheets to help determine what withholding allowances should be.
The vast majority of tax related items concerning children are all beneficial. However parents should be aware of the tax on a child’s investments income that is referred to as Kiddie Tax. If a child earns over $950 in interest, dividends, and other unearned income they will be required to file a tax return. For children that are under age 18 at the end of the year or a full-time student under the age of 24 who earn over $2,000 of the same type of income their earnings could be taxed at the parent’s tax rate instead of their own. These rules were originally put in place to prevent parents from sheltering investments in their children’s names purely for tax purposes. That is a simplification of the Kiddie Tax, but if you think your child may have a filing requirement contact your tax professional.
Now back to the good news! While children can reduce your taxable income through exemptions and possibly increased standard deductions, they can also create various tax credits on the tax returns. In the next installment of this blog we will discuss the credits available to parents and how to ensure these credits are used to their full advantage.