What to Know About Claiming a Baby As a Dependent on Your W-4

Amid all the excitement of pregnancy and bringing a new baby home, the last thing you're likely to be thinking about is updating the federal tax withholdings on your W-4 form at your workplace. But having a baby has important tax implications. You might be wondering what you need to know about claiming a new baby on your W-4 or even if you can claim an unborn child as a dependent.

Tax season is right around the corner, but even if it weren't, this is not a step new parents should put off for very long. The withholding details on your W-4 have a direct impact on the amount of money in your paycheck each week. And let's face it, especially when you're a parent, the size of your paycheck is no insignificant matter. Here's what you need to know about updating your W-4 form, claiming your new baby, and maximizing your salary.

Having a Baby Is a Major Tax Event

In case you weren't already keenly aware, your new bundle of joy triggers a major tax event— adding a new dependent to your household—and you'll need to adjust your W-4 tax withholdings form accordingly to reflect your new reality.

Your W-4 impacts the amount of federal income tax your employer takes from each paycheck and the birth or adoption of a child immediately adds a new dependent to your family, which in turn decreases your tax burden. However, this adjustment only happens once a baby is born. You can't claim an unborn child as a dependent on your W-4—pregnancy doesn't change your tax withholding allowances.

"Make sure your W-4 reflects your current situation," says Kari Brummond of TaxCure. "The IRS designs the W-4 so that if you fill it out correctly, your employer should withhold the correct amount of tax from your paycheck."

"A lot of people fill out a W-4 when they get their job, and they never fill out a new one again," continues Brummond. "Their payroll department may be calculating tax withholding based on an old situation. For instance, if their W-4 shows they're single with one job, but they're now married with two jobs, their paycheck may not have enough tax withheld."

When to Update Your W-4

Most experts say it's a good idea to update your W-4 within 10 days of the arrival of a new baby. However, it's important to note you can update this form any time of year. You don't have to wait for tax season or open enrollment at your workplace, for instance.

The W-4 form includes a personal allowances worksheet that's designed to help you calculate the correct number of withholding allowances to claim for your family, financial situation, and level of income once your new baby has arrived. And for each family, the level of withholdings may be slightly different.

For instance, if you're married, you may not be able to claim a dependent if your spouse is already doing so. Alternatively, if you have more than one job or a side hustle that brings in non-taxed income, that source of revenue may impact the level of withholdings you file on your W-4.

"It can get tricky if you have additional sources of income that don't have tax withheld. The withholding from your salary will not cover the taxes due on this other income," says Claire Hunsaker, a chartered financial consultant and CEO of the website AskFlossie.

In addition to the calculations worksheet on the W-4 itself, there are tax calculators available online that can help you determine the proper level of withholdings for your W-4 form, including a helpful one offered by TurboTax.

Additional Ways To Maximize Your Salary

When a new baby is joining your family, it's a good idea to ask your employer about all of the family benefits and programs offered at your workplace. Specifically, inquire about any programs that would be paid for from your paycheck pre-tax—thus lowering your taxable salary and potentially increasing your take-home pay. Programs that might meet this description include Flexible Spending Accounts, Health Savings Accounts, and Health Reimbursement Arrangement accounts.

It's also worth noting that if you're single and just gave birth or adopted a baby, you may now also qualify for Head of Household (HH) filing status, a shift that also comes with important tax benefits, explains H&R Block.

"The HH filing status gives you a larger standard deduction and more favorable tax brackets," the H&R Block website points out. "That means…you could be paying less federal tax as HH than you would as single for the same dollar amount of income."

This change in filing status is not part of your W-4 paperwork. To capture these financial benefits, you must claim Head of Household on your annual tax returns. You'll also want to confirm that you actually qualify for this status before claiming it on your tax returns. The IRS website provides further details about qualifications.

The Withholdings Balancing Act

As Intuit explains on its website, your W-4 form calculations are important because if you end up having too much money withheld from your paycheck, you're essentially giving the government an interest-free loan (in the form of your money). Of course, this can be a good thing if you like getting a big tax refund each year.

On the flip side, if you don't have enough money withheld from your pay, you will likely end up having to settle-up with Uncle Sam each year by writing a big check. Or worse, you could even face an underpayment penalty.

If you have questions about the level of W-4 deductions that make the most sense for you and your family, consider sitting down with a financial advisor to crunch the numbers.