Federal income tax significant events, Part 1 – Birth

Major life events can have a significant impact on your annual federal income tax return filed with the Internal Revenue Service (IRS).  This is the first in a series of blogs that will touch on some of these major life events and how they can impact your taxes.

A complete explanation of the above points is available on the IRS’s web site.

Birth.  Having a child has an impact on the number of exemptions you can claim on you federal income tax return.  For the 2011 tax year, an exemption allows you to subtract $3,700 from the amount of your taxable income, so each exemption you can claim will reduce the amount of federal income tax you pay each year.

You are allowed exemptions on your federal income tax return in the following circumstances:

  • You are allowed one personal exemption for yourself, as every person has one exemption.
  • If you are filing a return with your spouse, you are allowed one personal exemption for your spouse.
  • You are allowed one personal exemption for each dependent you claim, with the birth of a child adding to your number of dependents.

For example, if you and your spouse are filing a joint federal income tax return and you have two dependent children, you can claim a total of four exemptions on your federal income tax return (i.e., one of you, one for your spouse, and one for each child).  This means you have exemptions worth a total of $14,800 on your federal income tax return (i.e., 4 x $3,700).

Therefore, with the birth of each child, you gain an additional exemption that can be claimed on your federal income tax return, so long as they qualify.  For a child to qualify for you to claim them as an exemption on your federal income tax return, the child must meet all of the following criteria:

  • Relationship.  The child must be your son or daughter (by birth or by adoption), stepchild, foster child, or a descendent of any of them.  Or the child must be your brother, sister, half brother, half sister, stepbrother, stepsister, or a descendent of them.
  • Age.  The child must be under age 19 at the end of the year and younger than you (or younger than your spouse if you are filing a return together), a full-time student under age 24 at the end of 2011 and younger than you (or younger than your spouse if you are filing a return together), or permanently and totally disabled at any time during the year.
  • Residency.  The child must have lived with you for more than half the year.  Remember that each person has only one exemption that can be claimed on only one tax return.  Therefore, if the parents of a child are each filing separate tax returns, only one parent can claim the child on their tax return based on the living circumstances of the child.
  • Support.  The child must have provided less than half their own support.  That is, if your child earns an income, you must pay more than half of the child’s living expenses.
  • Joint return.  The child cannot file a joint federal income tax return for the year.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.