New Parent Tax Guide

Here’s what we’ll cover:

• Does My Child Qualify?
• Do I have a dependent?
• Deductions and Credits
  
  • Child Tax Credit (CTC)
  • Child and Dependent Care Credit
  • Medical and Dental Expenses Deduction
• Family Tax Planning Strategies
  
  • Tax Exempt/Advantage College Funds529 Plan
  • Head of Household Filing
  • Adoption Benefits

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Does My Child Qualify?

In order to qualify for any of the tax benefits identified below, your child will need to qualify as your dependent for tax purposes. A dependent can be anyone who is part of your household and relies on you for more than half of their financial support.

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There are two types of dependents: Qualifying Child and Qualifying Relative, and each has separate rules that must be met in order to classify them as a dependent.

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A Qualifying Child is a dependent who satisfies these tests:

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• Relationship test: To meet this test, the person must be your child or stepchild (whether by blood or adoption), foster child, sibling or step-sibling, or a descendant of any of them.
• Age test: The person must be (a) under age 19 at the end of the tax year, (b) under 24 if they're a full-time student and younger than you, or (c) any age if they're permanently and totally disabled.
• Residency test: The person must share a principal residence with you for more than half the tax year. Exceptions apply for circumstances like temporary absences (e.g., for illness, education, or vacation) or the birth or death of a child during the year.
• Support test: The person must provide less than half of their own support for the year.
• Joint return: The person must not file a joint return for the year (unless they file only to claim a refund of income tax withheld or estimated tax paid)

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A Qualifying Relative is a dependent that meets the following tests:

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• Residency test:  Your relative must live at your residence all year or be on the list of “relatives who do not live with you” in Publication 501.  About 30 types of relatives are on this list.
• Income test: Your relative can't have a gross income of more than $4,400 in 2022 and be claimed by you as a dependent.
• Support test: You must provide more than half of your relative’s total support each year.

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Do I have a dependent?

A dependent is only allowed to be claimed onto a single tax return.

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For children of divorced or legally separated parents, the custodial parent is typically the one who is allowed to claim the dependent.

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• For parents that have a 50/50 custody plan, the parent with the highest adjusted gross income (AGI) will usually make the claim.

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Having a qualifying child allows you to access deductions and credits that you would otherwise not be able to claim.

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• Tax deductions reduce the amount of income used to calculate your total tax
• Tax credits reduce the amount of tax you owe after your total tax is calculated

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If your effective tax rate is 22%, a $100 deduction would save you $22 in taxes, but a $100 credit would save you $100 in taxes.

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Deductions and Credits

Child Tax Credit (CTC)

The Child Tax Credit (CTC) is a tax credit that assists families with qualifying children. If you qualify, you can instantly reduce your total 2022 tax bill by up to $2,000 for each child under 16.

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To qualify, your child must:

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• Be 16 or younger at the end of the year;
• Be your child (son, daughter, stepchild, eligible foster child), sibling (brother, sister, stepbrother, stepsister, half-brother, half-sister) or a descendant of one of these (grandchild, niece or nephew);
• Provide no more than half of their own financial support during the year;
• Have lived with you for more than half the year;
• Be properly claimed as your dependent on your tax return;
• Not file a joint return with their spouse for the tax year, or file it only to claim a refund of withheld income tax or estimated tax paid;
• Be a U.S. citizen, U.S. national or U.S. resident alien.

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⚠️ If your income is over $200,000 (or $400,000 for married couples filing jointly), your eligibility to enjoy this credit may be reduced or eliminated.

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Child and Dependent Care Credit

If you pay someone to take care of your child or another member of your household while you’re working or while actively looking for work, you may qualify for the child and dependent care credit.

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Requirements: You must pay a care provider to care for a qualifying child under the age of 13 (at the time of care) or a disabled dependent of any age, to qualify for the tax credit.

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Calculating your credit: The credit includes up to 35% of up to $3,000 of qualifying expenses (max credit of $1,050) for one child or dependent or up to $6,000 of qualifying expenses (max credit of $2100) for two or more dependents.

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Reporting your credit: In order to take the Child and Dependent credit, you will need to report the following information for each care provider you paid during the year:

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• Name
• Address
• Tax ID Number
• Total amount paid

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Dependent Care Credit reporting exceptions:

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• If your care provider is a tax-exempt organization, the Tax ID Number is not required.
• If you are unable to obtain the name, address, or tax ID number of your provider, demonstrating an effort to obtain the missing information will be accepted.

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⚠️ Payments to a care provider who is also your spouse, the parent of your child, your child who is under the age of 19, or a dependent whom you can claim on your return will not qualify for this credit.

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Medical and Dental Expenses Deduction

You may be able to deduct certain out-of-pocket expenses you paid for medical and dental care for yourself, your spouse, and your dependents (i.e., a qualifying child or a qualifying relative).

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As far as the IRS is concerned, medical expenses are the costs of "diagnosis, cure, mitigation, treatment, or prevention of disease.”

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Requirement for taking the deduction: The deduction applies only to expenses that exceed 7.5% of taxpayer adjusted gross income. So, if AGI is $50,000, you can claim a deduction for medical expenses that exceed $3,750 ($50,000 × 7.5%). For more information see, IRS publication 502 (2021)

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Family Tax Planning Strategies

Tax Exempt/Advantage College Funds 529 Plan:

A 529 plan is a tax-advantaged savings plan that encourages saving for future education costs. It is primarily used to pay for the future education costs of children. There are two types of 529 plans:

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All states have at least one type of 529 plan, and many universities sponsor prepaid tuition plans.

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There are many tax benefits and potential drawbacks that come with 529 plans:

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• Many states offer tax benefits to contributions to either 529 plan, but they may have different restrictions depending on the state.
• You might only be able to use the tax benefit if you invest in a 529 plan in a state that you reside in.
• 529 Plans allow for annual exclusion gifts and you can front load 5 years’ worth of gifts.
  • To maximize your 529 plan, you can contribute up to $80,000 immediately (5 times $16,000), or if married, $160,0000 immediately (5 times $32,000).

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Withdrawing: When there are withdrawals from a 529 plan account, as long as they are used for qualified expenses or tuition, they are not subject to federal income tax and, in most states, state income tax. If they are not used for qualified expenses, then they are subject to a 10% penalty on earnings, federal, and state income taxes. Additionally, depending on the size of the account, the 529 plan can impact the beneficiary’s financial aid status.

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‍See 26 U.S.C § 529, An Introduction to 529 Plans (SEC), IRC §529

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Head of Household Filing

If you are a single parent that meets Head of Household requirements, you can enjoy preferential tax rate treatment and a standard deduction of $19,400 in 2022, rather than the $12,950 a single filer would have. Only one parent of a qualifying child may file as Head of Household.

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In order to file as Head of Household, you must:

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• be unmarried or unmarried by the last day of the tax year;
• pay more than half of the cost of up-keeping the home for the tax year; and
• have a qualifying child that lived with you for over half of the tax year.
  👆 This requirement can be modified in the year of your child’s birth and death

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See more at 26 C.F.R § 1.2-2 (b)-(e)

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Adoption Benefits

The adoption tax credit can be used to offset costs directly related to the adoption process.

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Qualifying expenses can include:

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• “reasonable and necessary” adoption fees,
• court costs,
• attorney fees, and
• traveling expenses (including lodging and meals.)

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Expenses that would not qualify are:

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• ones that qualify for other deductions/credits,
• surrogacy parenting expenses,
• adopting a spouse’s child (step-child), and
• adoption expenses allowed under an employment plan.

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The maximum credit available in 2022 is $14,890 and is lessened when you have a MAGI between $223,410 and $263,410.

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There are special rules for international adoptions and adopting special needs children. See more at 26 U.S.C §23, IRC §23, and Adoption Tax Benefits: An Overview pages 4-9

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References

Publication 501, Dependents, Standard Deduction, and Filing Information