New Baby, New Tax Benefits

Congratulations on your new baby! If you're the proud parents of a baby in 2003, you've already experienced some big changes in your household: diaper changing, a lot of crying and not very much sleep (for you).

Your new baby also is going to bring changes to your tax return this year. Much of it will be to your benefit.

Here's a glance of what you should expect, come tax-time in April:

You Have A Dependent
Not only do you now have a new baby who actually "depends" on you, you get to claim the new bundle of joy as a dependent on your tax return. An exemption means a reduction of income that would otherwise be taxed.

There are several requirements that qualify a child as your dependent. In the case of a newborn, there are just two:

• He or she must be a U.S. citizen or a bona fide resident of the United States, Canada, or Mexico for some part of the year.
• You must have provided more than half of your child's support in 2003. Support means the money you spent on providing for your child, whether necessity or luxury. It includes the value of housing, as well as diapers, formula, medicine, clothing, toys, and childcare expenses.

If you find yourself in a more complicated situation - say your child's support is paid by someone else such as another relative, Social Security, or welfare benefits - you must determine whether you paid more than half the support. If so, you can claim your baby as a dependent.

Further, there are rules that apply to parents who are divorced or separated. The custodial parent generally may claim the children as dependents but he or she may give the exemption to the non-custodial parent by signing a written agreement, either as part of the divorce decree or by using Form 8332 or a similar statement.

You Can Get Tax Credits
There are at three tax credits that you might qualify for as a new parent. Each credit would mean a reduction of tax liability for you.

Here's what they are and what they involve:

Child Tax Credit. You'll be able to claim a $1,000 per child tax credit. This credit is available regardless of your filing status. The credit generally cannot reduce your tax below zero but may be refundable up to the total amount of the credit allowed if your taxable earned income exceeds $10,000. The only requirement is that your baby is a U.S. citizen or resident.

Earned Income Credit. This earned income credit is a refundable credit available to lower-income workers. You may qualify if your income is less than $34,692 for 2003. The amount of the credit varies with your income level and the number of qualifying children you have. If you have two or more children, it may be worth up to $4,204 for 2003.

But there are a few stipulations to the earned income credit:

• You must sometimes adjust your income to determine the amount of your credit.
• If you have too much investment income, you may get no credit at all.
• You can't claim the credit if you are married filing separately.
• And if you and your child lived with someone else, such as your parents, deciding who gets the credit can get fairly complex.

If you need help on this one, check out this link H&R Block tax professional.

Child Care Credit. You may be entitled to a credit for what you paid someone to look after your baby while you (and your spouse) work or look for work. This credit allows you to receive a refund of up to 35 percent of your expenses (up to $3,000 per child with a maximum of two), depending on your income level.

To be eligible, you must pay more than half the cost of maintaining a home for yourself and your child. Generally, you (and your spouse, if you are filing jointly) must have some type of earned income during the year, such as wages or self-employment income. If filing jointly, you may still qualify for the credit if one spouse is disabled or is a full-time student.

A Social Security Card for a Baby?
It may seem silly to apply for a Social Security card for a baby, but it's actually important to do so as soon after your child's birth as you can. His or her Social Security number is a key piece of your getting some of the tax breaks to which you are entitled. If nothing else, not having it may cause unnecessary delays in the processing of your return. To apply for a Social Security number, file form SS-5 with the Social Security Administration.

Your Filing Status
If you're married and you live with your spouse, your filing status does not change now that you're parents. But if you're unmarried, or if you did not live with your spouse at any time during the last half of the year, you may be eligible to use the head of household status. To qualify:

• You must pay more than half the cost of maintaining a home for yourself and your child, and
• Generally, the child must live with you for more than half the year, or, for the year of birth, he must live with you more than half of the portion of the year he was alive.

Gifts for Baby
Generally, gifts to your baby do not count as taxable income. If you invest the gifts in your child's name, the earnings are usually taxable. But your child can earn up to $750 per year without creating a tax bill. If investment income exceeds that amount, you may be able to report your child's income on your own return. While this will save time and effort, it may increase your overall tax burden; so you may want to consider filing a separate return for your child.

If your child makes more than $1,500 per year in investment income, he or she may be subject to the so-called "kiddie tax," which causes some of the earnings to be taxed at your top tax rate. If you think you may fall into this category, you should see an H&R Block tax or financial advisor to do some planning.