When Jim and Pam, the couple on NBC’s The Office, had a baby earlier this year, they might have anticipated a tax benefit for adding another member to their family. Like many couples, after shelling out for the nursery, baby clothes, and delivery costs, they probably hoped for some kind of break from Uncle Sam to compensate them for creating the next generation of citizens. But for the most part, new parents are disappointed by the tax benefits their babies bring and find their new costs far outweigh any savings.
Consider these potential tax benefits for having a baby, as explained by Mark Luscombe, tax analyst for the firm CCH:
[See Can You Afford a Baby?]
1) New parents may be eligible for an exemption deduction of $3,650 for each child. For higher income taxpayers who pay the alternative minimum tax, however, that benefit may be eliminated.
2) Parents can claim a child tax credit of up to $1,000 per child. This tax credit begins to phase out for married couples filing jointly once they earn over $110,000. (For single filers, it begins to phase out at $55,000.)
3) Child and dependent care credit is given to help cover a percentage of daycare expenses. At most, the credit is $1,050 for one child and $2,100 for two or more children. The credit also phases out for higher earners but remains at 20 percent for those earning $43,000 and up.
4) Adoptive parents are eligible for a credit for adoption expenses of up to $12,170. For those earning over $182,520, the credit begins to phase out.
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5) Low to moderate income taxpayers may be eligible for the earned income tax credit, which can be larger for those with children.
Each one of those tax benefits phases out, either partially or completely, for higher earning couples like Jim and Pam, who work as sales representatives for a paper supply company. At the same time, higher earners also spend more on their children: According to the Agriculture Department, couples earning close to $100,000 and up spend almost $20,000 a year on their babies, while couples earning between about $57,000 and $100,000 spend closer to $12,000 a year.
Those expenses include housing, food, child care, clothing, and health care. The Agriculture Department also reports that as children age, they become more expensive. (But there are returns to scale: When couples have more children, they spend less on each one.)
[See Money Saving Tips for New Parents]
As Luscombe puts it, “Overall, for higher income individuals, a new baby does not offer tax breaks that would in any significant way compensate for the additional costs likely to be incurred.”
Jim and Pam do have some future tax benefits to look forward to, as their baby, Cecilia, grows up. If they decide to save money for her future college education, for example, then they can open a 529 college savings plan, which offers significant tax savings. Of course, by the time she’s ready to go to college, they will also likely have found themselves paying for everything from braces to summer camp to prom dresses.
There’s no getting around it, whether you’re eligible for Uncle Sam’s tax breaks or not: Kids are expensive.
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John of TX 10:53AM May 26, 2010
Judy of NM 9:56PM April 15, 2010
Judy of NM 9:56PM April 15, 2010