First Person: The Tax Implications of Having a Baby

Yahoo Contributor Network

Our second child was born in 2012. And while we are extremely excited about adding another family member to our ranks, it also raises certain financial issues. Increasing our budget, gauging baby expenses, factoring in costs over time when it comes to things like college and retirement planning all come to mind as areas in which baby will affect our finances -- be it now or in the future. But recently, I also began pondering what the tax implications of baby might be. And after doing our 2012 tax returns, here is what I found.

Federal Exemptions

Another child is a huge help with our federal exemption amount. This amount in 2012 was $3,800 per person. Therefore, between me, my wife, and our two children, we were able to accumulate a total of four such exemptions worth $15,200.

While an exemption is different than a credit, and simply lowers the total amount of income upon which we must pay taxes, every little bit helps, and being able to cut out $15,200 worth of income at say 15 percent, cuts nearly $2,300 off our tax bill, our second child being worth $575 of this amount.

Child Tax Credit

The one time a year that I'm glad we aren't a high income family arrives when I do our taxes and find that we're eligible for the child tax credit. While apparently this credit is set to be cut in half in 2013, at least we got to take full advantage of it for one year after we had our second child.

Even though our baby was born well into 2012, we were still eligible for the credit since she was born in that tax year. We were able to take full advantage of the credit, which added $1,000 -- $2,000 for both children -- to our total credit amount. The great thing about these credits is that unlike exemptions, the credit reduces our taxes owed dollar for dollar, cutting a total of $2,000 off our total taxes owed, our second child being responsible for half this amount.

State Tax Returns

Having a child isn't as helpful with reducing costs on our state taxes but it's better than nothing. In this aspect of our income tax owed in Illinois, we received an exemption of $2,050 per person. Therefore, adding another mouth to feed, increases our exemptions by this amount to a total of $8,200 for a family of four. With an Illinois income tax rate of 5 percent, this reduces our tax liability by a total of just over $400, our second child being responsible for about $100 of this amount.

Therefore, our second child has helped us cut our overall tax bill by around $1,675. While it certainly doesn't balance her annual costs, it is definitely a help nonetheless.

*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.

More From This Contributor:

5 Websites that Could Save You Money

How I Differentiate My Blog

Preparing to Publish My First E-book

Disclaimer:

The author is not a licensed financial or tax professional. The information provided in this article is for informational purposes only and does not constitute legal, financial or tax advice. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.

Rates

View Comments (0)