The tax joys of parenthood
By Kay Bell • Bankrate.com

Is there a new baby in the house? That's good news in many ways, especially at tax time when the chip off the old block will help you chip away at your tax bill.

A growing family makes you eligible for a variety of tax savings. You get an additional exemption, may be eligible for several credits and can use tax-favored ways to save and pay for Junior's college. You might even be able to lower your taxes by shifting some of your higher-taxed income to your youngster, either as an asset gift or as salary if you own your own business.

Here are some common tax matters every new -- and experienced -- mom and dad needs to consider.

Filing status
The first tax-return item a taxpayer encounters is the choice of how to file. For many couples raising kids together, this is easy. The married-filing-jointly option offers a larger standard deduction and allows some tax breaks that are denied unmarried filers.

If, however, you are raising children alone, don't shortchange yourself by choosing the wrong status. You can file as a head of household if, for more than six months, you provided over half the cost of keeping up a home for yourself and your kids. Tax rates and the standard deduction for head-of-household filers are more favorable than those for the single or married-filing-separately categories.

Parents who have lost spouses also have a choice. You may file as a qualifying widow or widower with a dependent child for two years after the year your husband or wife died. This status gives you the same filing consideration afforded married filers. For example, a father whose wife died in 2003 could use this category for 2004 and 2005 returns. (He would have filed as married filing jointly on his 2003 return, the year he lost his wife.) For the subsequent tax years as a qualifying widower, he can use the joint tax rates and, if he doesn't itemize, claim the highest standard deduction amount.

Exemptions, AKA dependents
A prime child-related tax saving comes from the additional personal exemption you claim on your return. The IRS sets a dollar amount (adjusted annually for inflation) that you multiply by the number of your exemptions. That amount is then subtracted from your income. The lower your income, the lower your tax bill.

Each dependent is an exemption. The IRS has rules on just who qualifies as a taxpayer's dependent. That's generally not a problem for parents with young kids at home. But what about when they earn their own money from an after-school job or are off at college? While you may have to do a little figuring, especially to see if your young worker needs to file his own return, this generally won't invalidate the kid's status as your dependent. The key considerations here are whether you are the child's primary source of support or if he's a full-time student at State U.

If you're filing as a single parent for the first time, other child-related issues arise. Where a formal divorce decree is involved, be sure you follow the custody rules set out there. They determine who gets to claim the children. When custody is shared, parents must decide who claims the children. Often, the dependent deduction is split, with the father claiming one child and the mother the second one. Make sure you and your ex are clear on this so that double dependent claims don't raise any Internal Revenue Service red flags.