Being a new parent means juggling priorities, and taxes might not be at the top of your list. However, even with the challenges of sleepless nights and staying home, it’s essential to make time for tax preparation.
Your tax situation becomes more complex with a new child, but the upside is that you become eligible for various tax credits and deductions. Let’s break down what new parents should keep in mind for the upcoming 2024 tax season:
- Prioritize Tax Preparation
- Increased Complexity
- Potential Benefits
So, understanding these key points will help you navigate the tax season as new parents. Let’s explore these further in the blog.
How Child Tax Credit Works?
The Child Tax Credit is currently valued at a maximum of $2,000 per qualifying child under 17 for 2023. This credit directly reduces your taxes by the same amount.
For most average-income individuals, you can expect the full $2,000 benefit, as this often aligns with your tax liability. This information comes from Tommy Lucas, a certified financial planner.
The phase-out of this tax break begins when your modified adjusted gross income (MAGI) reaches $200,000 for single filers and $400,000 for married couples filing jointly.
A significant aspect is that up to $1,600 of the credit is currently refundable for 2023. This means you could receive a refund even if you owe zero taxes. However, accessing this refundable portion becomes challenging for lower earners who usually have minimal or no tax liability.
Individuals with limited earned income may qualify for a reduced amount or, in some cases, none of the credit.
How Having a Child Affects Your Taxes in 2024
When it comes to taxes and having a child in 2023, the impact on your tax bill or potential refund isn’t a one-size-fits-all situation. Your income plays a crucial role in determining how much you’ll benefit.
If you’re on the lower end of the income scale, having or adopting a child could mean more generous tax credits and deductions for you. John, a CPA and managing director at John Geantasio LLC, a tax accounting services firm, emphasizes this point. So, the financial outcome of adding a child to your family depends on various factors, including your income level.
Adoption Tax Credit for 2023
If you adopted a child in 2023, you could qualify for a credit of up to $15,950 for each child. This credit covers expenses like adoption-related attorney fees, adoption fees, and travel expenses.
To claim the full credit, your modified adjusted gross income, which is usually close to your adjusted gross income, must be below $239,230. The credit gradually decreases for those with a modified gross adjusted income between $239,230 and $279,230.
Keep in mind that this credit is not refundable. If you don’t owe any taxes, you can’t claim it directly. However, you have the option to carry it forward to reduce your tax liability in the future.
Proposed Increase in Child Tax Credit
A recent tax bill aims to enhance the child tax credit, offering potential benefits for low-income individuals. According to the Urban-Brookings Tax Policy Center, if the bill is enacted:
- The refundable portion of the child tax credit could rise to $1,800 for the tax year 2023, $1,900 for 2024, and $2,000 for 2025.
- The current calculation method, which multiplies earned income above $2,500 by 15%, might change. The new formula would be on a per-child basis, allowing families with multiple children to qualify for a higher credit.
- To address disparities, especially favoring higher-income individuals, the proposed changes aim to make the CTC more equitable.
- For tax years 2024 and 2025, filers may use the prior year’s earned income to calculate the credit. Additionally, the $2,000 tax credit would be adjusted for inflation.
These adjustments seek to create a fairer distribution of benefits and alleviate the current imbalance in the CTC system.
Navigating Tax Benefits for Single Parents with Children
1. Obtain a Social Security Card for Your Child
Ensure your child has a Social Security number first, advises John Karls, a tax partner at Armanino, a national tax advisory firm. You cannot claim your child as a dependent on your tax return without a Social Security number.
If your child doesn’t have one yet, apply now. Keep in mind that it may take some time for the Social Security Administration to verify your child’s birth certificate and identity. While waiting, John Karls suggests filing for a six-month tax extension.
2. Head of Household Status for Single Parents
As a single parent, you’re recognized as the head of the household for tax purposes. This designation allows you to claim a $20,800 standard deduction, which is higher than the $13,850 standard deduction for single filers without dependents.
To benefit from the more favorable tax brackets for heads of households, it’s crucial to manually indicate your status. You can do this by checking a box on your tax forms or informing your tax preparer.
If you’re married and covering more than half of your child’s expenses, you can still be considered a head of household. However, this is only applicable if you file separately from your spouse.
Child Tax Credit for 2023: Eligibility and Income Limits
If you became a parent in 2023, you may qualify for the Child Tax Credit. To be eligible, ensure that your adjusted gross income is below $200,000, or $400,000 if filing jointly with a spouse.
Child and Dependent Care Credit Income Limit:
To qualify for the Child and Dependent Care Tax Credit, you need earned income in 2023 and work-related care expenses. You can claim up to $3,000 for one child or $6,000 for two or more children, with the actual credit being a percentage of those expenses. Check IRS Publication 503 for the formulas.
EITC Qualifications:
If you have a child and your adjusted gross income was $46,560 (filing alone) or $53,120 (filing jointly with a spouse), you could claim up to $3,995 in a refundable tax credit through the Earned Income Tax Credit.
W-4 Withholding Adjustments:
Ensure you fill out a new W-4 form with your employer if you now have a dependent. This may reduce next year’s refund but will increase your paychecks as less money will be withheld.
How to Claim IRS Child Tax Credit for 2024?
- File Your Tax Return: Submit your tax return with Schedule 8812, titled “Credits for Qualifying Children and Other Dependents.”
- Check Eligibility: Use the form to determine if you qualify for the additional refundable part of the Child Tax Credit.
- Provide Child Details: For each eligible child, provide their name, SSN, and relationship to you on Schedule 8812.
- File by Deadline: File your federal tax return for 2023 by April or October 15, 2024, if you request an extension.
- Verify Child’s Eligibility: Answer questions about the child’s residence and who covers their expenses to ensure eligibility.
- Use Form for Calculation: The form simplifies credit calculation, considering both the total credit and income-based adjustments, depending on eligible children.
- Calculate Return Credit: If applicable, do the math for the return credit, especially crucial for those with modest incomes.
- Double-Check Information: Verify all details to prevent delays in credit processing.
Child Tax Credit Eligibility Criteria for 2024
To qualify for the Child Tax Credit in 2024, ensure the following:
- Age Limit: The child should be under seventeen at the end of 2024.
- Social Security Number: The child must possess a valid Social Security number.
- Relationship: Eligible individuals include sons, daughters, grandchildren, foster children, or descendants of any of these.
- Residency Requirement: The child should have primarily lived with the claimant.
- Citizenship Status: The claimant must be a resident immigrant aging out of the U.S. or a U.S. citizen by birth.
- Filing Status: Married claimants are not obligated to file income tax returns jointly.
Bottom Line
Remember, if you’re claiming the child tax credit or earned income tax credit, refunds won’t come before Feb. 27, as mandated by law.
In a nutshell, play it safe, file accurately, and the IRS has your back for any retroactive changes.
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