Everything New Parents Need To Know About Filing Taxes This Year
If you welcomed a child to your family in 2020, congratulations. Not only do you have an heir and a legacy, but for the rest of your life, you’ll have an awesome story about how you welcomed a child into your life during the weirdest year ever. You also have a whole lot of changes coming to your taxes, which just got more complicated. The good news is, they might have gotten cheaper. Kids equal tax breaks for millions of Americans, and the latest addition to your family might just lower your tax bill or boost your refund.
Find Out: What Are the 2020-2021 Federal Tax Brackets and Tax Rates?
Chances are good you haven’t slept for a full night since you added the bundle of joy, and it’s understandable if trudging through IRS documents isn’t high on your list. This guide does the hard work for you and offers the key points you need to know in brief.
Last updated: Feb. 15, 2021
The Child Tax Credit Can Save You Thousands
A new child born in 2020 is eligible for a tax credit up to $2,000 under the Child Tax Credit. The full credit applies no matter when in the year the child was born, but in order to qualify, the child must have been issued a Social Security number before April 15 of this year (not 2020).
Read: All the New Numbers You Need To Know for Planning Ahead on Taxes
It’s Not Just a Deduction
Unlike deductions, which reduce the amount of income the government can tax, credits directly reduce your tax bill on a dollar-for-dollar basis. Up to $1,400 of the $2,000 maximum Child Tax Credit is refundable, meaning you can get that part back as a refund even if you don’t owe any tax. That refund is known as the Additional Child Tax Credit.
Find Out: These Are the Receipts To Keep for Doing Your Taxes
The Additional Child Tax Credit Can Be Tricky
The misleadingly named Additional Child Tax Credit — it’s not actually additional — can be worth $1,400, but you must have earned some income to claim it. The amount of the credit is capped at 15% of income over $2,500. TurboTax gives this example of someone with three eligible children whose earned income was $29,500. The credit would apply to $27,000, which is the amount over $2,500. Capped out at 15%, that would leave the taxpayer with a credit of $4,050 instead of the full $6,000.
Be Informed: The Major Tax Changes for 2021 You Need To Know About
It’s Unlimited — and Keeps On Giving
If you had twins — or triplets or quadruplets or whatever comes after that — good luck. You’ll need it. Also, don’t worry, each and every one of your children is eligible for up to $2,000 under the Child Tax Credit. Also, the credit applies to children in most situations until they turn 17 years old.
Mark Your Calendar: Tax Year Deadline Dates You Need To Know
The Credit Can’t Be Carried Forward
Some credits can be carried forward to future years, meaning that if a tax credit is bigger than the taxpayer’s liability, the remaining credit can be held and used again the next year. The Child Tax Credit does not work that way and no portion of the credit can be carried forward to future tax years.
Read More: 8 New or Improved Tax Credits and Breaks for Your 2020 Return
It’s Phased Out at Higher Incomes
The reason the Child Tax Credit is good for “up to” $2,000 is that it’s phased out for higher-income earners. For single filers, the credit starts getting smaller at $200,000. For married couples filing jointly, the credit starts being phased out at $400,000.
In the News: IRS Pushes Back Start of Tax Filing Season – Will It Delay Your Refund?
It’s Not Limited to Biological Children
If your new arrival was adopted or is a foster child, he or she is still eligible for the Child Tax Credit, provided you claim the child as a dependent and meet the other qualifications. Even better, the child is likely eligible for the Adoption Credit, which is juicier than even the Child Tax Credit. It’s worth up to $14,300 per child. It’s not refundable, but any credit beyond your tax liability can be pushed forward for as many as five years.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Everything New Parents Need To Know About Filing Taxes This Year
