Don’t Miss Out! The Complete Tax Deduction Checklist for New Parents

Before we dive into any of the exciting credits or deductions, we have to cover the most critical first step: getting your baby a Social Security Number (SSN). Think of the SSN as the golden key that unlocks all the child-related tax benefits. Without it, you cannot claim your child as a dependent on your tax return.

You might be thinking, ‘Another piece of paperwork? Really?’ I get it! But trust me, this one is the most important. Fortunately, the process is usually quite simple. The easiest way to get an SSN for your newborn is at the hospital when you are filling out the paperwork for their birth certificate. There will likely be a question on the form that asks if you want to apply for a Social Security Number for your child. Just check ‘Yes’!

By doing this at the hospital, the information is sent to the Social Security Administration (SSA) automatically. Your baby’s Social Security card will then be mailed to you, usually within a few weeks. It’s one less thing to worry about once you get home.

What if I didn’t apply at the hospital?

No worries if you missed this step in the post-delivery haze! You can still apply for your baby’s SSN. You’ll need to:

• Complete an Application for a Social Security Card (Form SS-5).
• Provide original documents proving your baby’s age, identity, and U.S. citizenship (usually the birth certificate).
• Provide original documents proving your own identity (like a driver’s license or passport).

You will then need to visit your local Social Security office. It’s an extra step, but it’s absolutely essential. Make this your top priority, as you’ll need that number when it comes time to file your taxes.

Alright, let’s talk about the headliner, the main event of new parent tax benefits: the Child Tax Credit (CTC). This one is a game-changer for many families. Unlike a deduction, which lowers your taxable income, a credit is a dollar-for-dollar reduction of the actual tax you owe. If the credit is more than what you owe, you might even get the difference back as a refund! It’s a direct boost to your family’s finances.

For the 2023 tax year (the one you file in 2024), the Child Tax Credit is worth up to $2,000 per qualifying child. Up to $1,600 of that is refundable, which is known as the Additional Child Tax Credit (ACTC). This means even if you don’t owe any income tax, you could still get a refund of up to $1,600.

Who Qualifies for the Full Credit?

To claim your new baby for the CTC, they must meet several criteria. Don’t worry, it’s pretty straightforward for a newborn living with you:

• Age Test: The child must be under the age of 17 at the end of the tax year. Your newborn easily passes this one!
• Relationship Test: The child must be your son, daughter, stepchild, eligible foster child, brother, sister, or a descendant of any of them (like a grandchild).
• Residency Test: The child must have lived with you for more than half of the year. Exceptions apply for newborns; if your baby was born during the year, they are considered to have lived with you for the entire year.
• Support Test: The child must not have provided more than half of their own financial support during the year. (Definitely true for a baby!)
• Dependent Test: You must claim the child as a dependent on your tax return. This is where that SSN comes in!

There are also income limits. The credit begins to phase out for parents with a modified adjusted gross income (MAGI) of over $400,000 on a joint return, or $200,000 for other filers. Most new parents fall well within this range and can claim the full amount.

For parents who have grown their family through adoption, there is a separate, incredibly valuable tax credit available. The Adoption Tax Credit is designed to help offset the immense expenses that can come with the adoption process. This is a nonrefundable credit, which means it can lower your tax liability to zero, but you won’t get any of it back as a refund beyond that. However, if the credit is more than your tax liability, you can carry the unused portion forward for up to five years.

For 2023, the maximum credit is a generous $15,950 per eligible child. This can make a huge difference for families.

What Expenses Are Covered?

The credit is meant to cover ‘qualified adoption expenses.’ This includes:

• Reasonable and necessary adoption fees
• Court costs and attorney fees
• Traveling expenses (including amounts spent on meals and lodging while away from home)
• Other expenses directly related to the legal adoption of an eligible child

It’s crucial to keep meticulous records of every single expense. Create a dedicated folder or digital file and save every receipt and invoice related to the adoption process.

Who is an ‘Eligible Child’?

An eligible child is an individual who is under 18 years old. If the person being adopted is physically or mentally incapable of self-care, the age limit does not apply. If you adopt a child with special needs from the U.S. foster care system, you may be able to claim the maximum credit amount regardless of your actual expenses. This is a wonderful provision to support families adopting children who need it most. Like the CTC, this credit also has income phase-out limits, so be sure to check the IRS guidelines for the specific tax year.

Once you’re back to work, childcare costs can become one of the biggest new expenses in your budget. The Child and Dependent Care Credit is here to help with that. This credit helps parents pay for the daycare, nanny, or other care they need for a child under 13 so that they can work or actively look for work. If you are married, both spouses generally must be working or looking for work to qualify.

The amount of the credit is a percentage of the amount you paid for care. For 2023, you can claim up to $3,000 in expenses for one child or up to $6,000 for two or more children. The percentage you can claim ranges from 20% to 35% of your expenses, depending on your adjusted gross income. The lower your income, the higher the percentage.

To claim this credit, you’ll need to have the name, address, and Taxpayer Identification Number (TIN) of your care provider. This could be the Social Security Number of an individual caregiver or the Employer Identification Number (EIN) of a daycare center. Reputable providers will give you this information without any issue at the end of the year.

Let’s look at what counts as a qualifying expense:

From prenatal appointments to well-baby visits, the medical bills can add up quickly. The good news is that you may be able to deduct some of these costs. The medical expense deduction allows you to deduct the amount of qualifying medical expenses that is more than 7.5% of your adjusted gross income (AGI).

This threshold can be hard to meet, but with the high costs of childbirth and newborn care, many new parents find they qualify in the year their baby is born. You have to itemize your deductions to take advantage of this, rather than taking the standard deduction. It’s worth running the numbers both ways to see which saves you more money.

What Can You Include?

Many new parents don’t realize just how many expenses can be included. It’s not just the big hospital bill! Keep track of everything, including:

• Payments to doctors, dentists, surgeons, and other medical practitioners.
• Hospital care costs, including the cost of the delivery.
• Prenatal and postnatal care for the mother.
• Well-baby checkups and vaccinations.
• Prescription medications for both mom and baby.
• Fees paid to a lactation consultant for breastfeeding assistance.
• The cost of a breast pump and other lactation supplies.
• Transportation costs to get to medical care. You can track your actual costs (gas, oil, parking) or use the standard medical mileage rate set by the IRS (it was 22 cents per mile for 2023).

Safety and Savings Tip: Keep a small notebook or use a mileage tracking app in your car to log every trip to the pediatrician, OB-GYN, or pharmacy. Those miles can add up and contribute to your deduction!

While you’re focused on the here and now, it’s also a great time to think about the future. Using tax-advantaged accounts can provide benefits on your taxes today while setting your child up for success tomorrow.

529 College Savings Plans

It might feel lightyears away, but starting to save for college early is one of the best gifts you can give your child. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. While your contributions are not deductible on your federal tax return, the money in the account grows tax-deferred, and withdrawals for qualified education expenses are completely tax-free. Plus, more than 30 states offer a full or partial state income tax deduction or credit for your contributions. It’s a win-win: you lower your state tax bill now and build a nest egg for their future.

Health Savings Accounts (HSAs) & Flexible Spending Accounts (FSAs)

If you have a high-deductible health plan, you may be eligible for a Health Savings Account (HSA). If your employer offers one, you might have a Flexible Spending Account (FSA). Both of these accounts allow you to set aside pre-tax money to pay for qualified medical expenses. When your baby arrives, you can use these tax-free funds to pay for everything from co-pays at the pediatrician to prescription costs and even the breast pump we mentioned earlier. Using pre-tax dollars to pay for these items is like getting an automatic discount equal to your tax rate.