Some friends told me over the weekend that they were surprised to learn recently that they are expecting a baby. They have one child who is nine years old and believed that they were done with the baby thing. But that was apparently not the case.
Among the excitement for them and ribbing of the father about being too old to have another child, they told us the baby is due in January 2014. January 2014? We asked half joking if they could have the doctor induce delivery of the baby a few weeks earlier in December 2013 so that they would get the tax benefit of having a second child this year. Because a new baby means a new tax deduction.
A New Baby, A New Tax Deduction: The Dependent Exemption
The IRS allows taxpayers to take an exemption for themselves and every individual they claim on their tax return. An exemption is a set amount of income on which the IRS does not require a taxpayer to pay income tax.
For the typical couple using the married filing jointly filing status, they start with two exemptions on their tax return, one for the husband and one for the wife. The couple can also take an exemption for each dependent they claim on their tax return. Hence a new baby, a new tax deduction.
The IRS can change the value of an exemption each year based on inflation. For the 2012 tax year, exemptions were worth $3,800 each. For the 2013 tax year, the amount of an exemption increased to $3,900 per person.
Part of the reason the IRS grants a dependent exemption for children is to help offset those baby expenses with savings on the income tax front. When my friends bring the new baby into their home in January 2014, they will of course have all the expenses that come with a baby, including diapers, formula, and all those baby toys they had cleared out years ago. But by having the baby in January 2014 rather than December 2013, they will permanently miss out on the dependent exemption for 2013.
Exactly how much tax savings will missing out on one more dependent exemption in 2013 cost them? While I do not know how much income my friends earn each year, I can come up with an estimate to get an idea of the lost tax benefit.
For 2013, those couples who use the married filing jointly filing status and earn between $72,500 and $146,400 fall into the 25% tax bracket. This means that for every extra dollar of income they earn they will have to pay 25% of it to the IRS.
By missing out on the $3,900 dependent exemption in 2013, this is $3,900 of income they will have to pay income tax on when they file their taxes around April 2014. Some quick math tells us that 25% of $3,900 is $975. That is $975 out of my friend’s pockets because their new baby is coming in the next tax year as opposed to this tax year. That is a lot of diapers!
In addition, if my friends earn less than $110,000, they are also missing out on a $1,000 tax credit for the 2013 tax year, which begins to phase out for incomes above $110,000. Since a tax credit is a reduction of the actual tax liability a taxpayer owes rather than a reduction of taxable income, that $1,000 is a dollar for dollar loss to my friends.
When combined with the $975 in taxes calculated above based on the 25% tax bracket, that brings the total hit to $1,975. That is an awful lot of diapers! And all of this because of a timing difference of only a few weeks.
Getting Help from a Tax Attorney
If you like my friends are welcoming a new baby into your home, congratulations! In the event you need some help understanding how tax deduction associated with that new child or with any other aspect of completing your tax return, you can get that help by contacting a tax attorney. A tax attorney is a professional whose job is to know the tax law so that he can help individual like you and me file our income taxes correctly, to help be sure we take advantage of every opportunity to legally save on the amount of income taxes we pay.
You can get help from a tax attorney by calling the phone number located at the top of this web site. A tax attorney will get in touch with you to discuss your situation. Since the initial consultation is free of charge and does not obligate you to anything further, you have every reason to make that call today.
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.