Babies' birthdays determine tax year tax breaks
Sunday, January 05, 2020
A staple feature each New Year's Day is the fixation on babies born just after the clocked clicked past midnight.
For the families, it's usually a joyous event, with their new bundles of joy being showered with first baby themed gifts from local merchants.
Tax professionals, even those with families, however tend to see such celebrations as a tad misplaced.
Or, as Jerry Gaddis, an Enrolled Agent in Florida, describes it, "bad tax planning."
Am I the only one who sees this and thinks "bad tax planning"? #EnrolledAgent— Jerry Gaddis. EA, MBA (@TropicalTax) January 2, 2020
Timing of child-related tax breaks: Sure, the family will get some tax help thanks to the many child-related tax breaks in the Internal Revenue Code.
But since New Year's babies are born on the first day of the year, the parent must wait the full year to claim the help from Uncle Sam. Hence Gaddis' professional observation.
That's because, as with marriage and divorce, the birth of child matters when it comes to taxes.
In most cases, when a baby arrives on Dec. 31, for tax purposes all the potential tax breaks are available for the full year even though the infant only spent one day in that year.
If the baby had been born the last day of 2019, the parents could, for example, claim the child tax credit on their 2019 tax return. That's true even when the delivery is at 11:59 p.m. on Dec. 31.
As long as the child is born at any time during the tax year, the new family addition qualifies to be considered when it comes to various baby (and older) tax breaks.
Arrivals on 12:01 a.m. Jan. 1, however, mean that the parents must wait until they file their tax return the next year to get any tax breaks.
This annual battle over whether it's better to be the last baby of the year (it is for tax purposes!) or the first newborn in the new year earns a dual recognition of 31 and 1 as this weekend's By the Numbers figures.
Baby breaks regardless of birth date: So all you parents who welcomed bundles of joy just before Jan. 1, don't fret about the diaper service and gift certificates you didn't get.
Instead focus on the valuable tax help that Uncle Sam offers your bigger family, some a bit sooner thanks to your babies' arrival dates.
True, under the Tax Cuts and Jobs Act (TCJA) changes in effect through 2025, there's no longer a dependent exemption.
But myriad other child-related tax breaks are still around post-tax reform. They include:
- Child Tax Credit — The TCJA actually expanded this tax break from $1,000 to $2,000. Even better, since it's a credit, it offers a dollar-for-dollar reduction of any tax the eligible taxpaying parent owes. Best of all, $1,400 of the Child Tax Credit is refundable. This means, as the name indicates, that if a taxpayer doesn't owe any tax before claiming the credit, the filer can receive the refundable amount as a tax refund.
- Child and Dependent Care Credit — Working parents know that finding the perfect caregiver for a youngster is difficult and expensive. The child care credit can help. This tax break, again a valuable tax credit, covers up to $3,000 spent on care for one child or up to $6,000 for the care costs two or more kids.
- Child care flexible spending account (FSA) — This account is a common workplace benefit that allows you to put pre-tax dollars into it and then use the funds to pay for or reimburse your for eligible child-care costs.
- Various educational savings options — Tax-favored accounts such a 529 plan or Coverdell Education Saving Account provide ways to save for your child's college or some pre-university expenses.
- Earned Income Tax Credit (EITC) — This tax credit is a welcome benefit for working middle class and lower earning taxpayers. And it can provide substantial tax benefits (for qualifying families.
And if your youngster waited to help welcome in the new decade, don't despair. Just make a note of these tax breaks and be sure to claim them on your tax return next year.
Twins split decade birthdays, tax breaks: At least two families will be able to get some child-related tax breaks for 2019 and 2020.
In Indiana, baby Joslyn was born first. Her brother Jaxon arrived about a half hour later.
It happened in Minnesota, too, with twin brothers George and Remi being born on New Year's Eve and New Year's Day, respectively.
These proud parents now get to claim some tax breaks this coming filing season for their children born in 2019 and more on their 2020 tax returns filed in 2021 for the slightly younger siblings.
Twins' on different dates: Separate birth dates for twins is not that uncommon, since childbirth (or so they tell me) operates on its own seemingly magical schedule.
Those differing days sometimes straddle two tax years. We saw Dec. 31/Jan. 1 twin birthdays in 2013/2014 and in 2015/2016. And those are just the ones that got news (and blog) coverage.
Regardless of when it happens, I love it when family and tax planning converge, even by chance.
You also might find these items of interest:
- Dec. 31 wedding and divorce tax matters
- 5 tax breaks to help offset child-rearing costs
- Adoption tax credit, other family-related 2020 inflation amounts changed by new tax law
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