While taxes aren’t the first thing you think about when your new baby arrives, forgetting anything on this list could have you scrambling come tax time.
1. Your baby needs a Social Security number (SSN). Even though obtaining a SSN for your baby is voluntary, it’s necessary in order for you to claim him or her on your taxes. This number may also be necessary if you intend do any of the following for your child: open a bank account, buy savings bonds, or apply for government services. Many hospitals will get the process of obtaining your child’s SSN started for you, and you can also apply at your local Social Security office.
At the hospital, you will be asked to give information for your baby’s birth certificate. You will also be asked if you would like to apply for an SSN for your baby. To do so, you will need to provide both your SSN and the SSN of your spouse, if possible. If you cannot provide this information, you may still apply for an SSN for your baby.
Once your child has a SSN assigned, be wary. Believe it or not, identity theft can start shortly after birth. Children are prime targets for identity thieves because they have clean credit files and don’t check their credit reports. Thieves also know that it will likely be years before the theft is discovered.
In many cases, friends or family members who have easy access to a child’s personal information will commit identity theft using that child’s SSN. In other cases, the information can be obtained from hospital records or daycare records. It can be compromised in a data breach, or a negligent employee can lose or steal the information.
You may want to regularly check your child’s credit report to see if the assigned SSN is being used. If there is activity on your child’s credit report, place a fraud alert on the credit file and file a report with the Federal Trade Commission (FTC).
2. Your life will be easier if your childcare provider has a taxpayer identification number. Parents who work typically rely on childcare. It can be extremely expensive, but the Child and Dependent Care Credit can help ease the burden. This credit is available to parents who paid for childcare in order to work or actively look for work. Generally, it is limited annually to $3,000 for one qualifying child or $6,000 for two or more children. (Check with your tax pro or the IRS’s website before filing because limits may differ based on the tax year.)
In order to claim the credit when paying taxes, you may need to provide on your return the name, address, and taxpayer identification number—either SSN or employer identification number (EIN)—of the childcare provider. Request that information using Form W-10.
If your childcare provider cannot provide you with this information, you may still be able to claim the credit by demonstrating that you did your due diligence. You’ll need to fill out Form 2441, write “see attachment” in the columns requesting the missing information, and attach to the form a statement that explains to the IRS that the childcare provider refused to give you the required information.
3. In some cases, you can write off medical expenses. If you itemize your deductions on Form 1040, Schedule A, you may be eligible to deduct your child’s—and your own—medical expenses, should they exceed a certain percent of your adjusted gross income (depending on your age).
Track all of your out-of-pocket medical costs, including co-pays, parking fees, doctor visits, prescriptions, and medical insurance premiums. Do this from the first day of the year, even before your baby is born. In most cases, you will not have enough medical expenses to itemize. However, in the event that your care or your baby’s care is more costly than you had planned, you will have all the documentation you need in order to itemize medical expenses.
4. You may need proof that your baby is yours. If you use a tax pro to do your taxes and you claim the Earned Income Tax Credit (EITC) or the Child Tax Credit, your tax pro needs proof that you can claim your child or else he or she could be fined $500. Even if you don’t use a tax pro, the IRS could review your claim and ask you to submit proof that the child is yours and lives with you.
To prove that your child is yours and lives with you, you’ll need the appropriate documentation. This can include (but is not limited to) a certified copy of your child’s birth certificate, a statement from your landlord or healthcare provider saying the child lives with you, your marriage certificate, and school records (when your baby gets older). Be sure to make extra copies of these documents so they’re ready whenever you need them.
Myth: Some people think that when you have a baby, you can write off all the costs of feeding and caring for him or her. This is simply not true. Most of those costs are generally not deductible.
Eva Rosenberg, EA is the publisher of TaxMama.com ®, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.