A New Child and Your Taxes: Credits, Accounts, Payroll
The credits, accounts, and payroll changes that come with a baby — including the 2025 law's child credit, dependent care, and the new child investment account — and the ones that work differently for business owners.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A new child changes the return in the first year: a child tax credit of $2,200 for 2026 (indexed under the 2025 law), a larger dependent care credit and a $7,500 dependent care assistance limit from 2026, a federally seeded Trump account (Section 530A) for children born from 2025 through 2028, and the option to open a 529 plan.
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What changed under the 2025 law?
| Item | 2026 rule |
|---|---|
| Child tax credit | $2,200 per child under 17, indexed; up to $1,700 refundable; requires a Social Security number for the child and for at least one parent; phases out above $200,000 ($400,000 joint) |
| Dependent care credit | Up to 50 percent of $3,000 of expenses for one child ($6,000 for two or more); the rate falls to 35 percent once AGI passes $43,000, then to 20 percent between $75,000 and $103,000 of AGI ($150,000 and $206,000 joint) |
| Dependent care assistance plan | Employer-provided or cafeteria plan amounts excluded up to $7,500 a year (up from $5,000) |
| Trump account (Section 530A) | A federal $1,000 pilot deposit, elected on Form 4547, for U.S. citizen children born January 1, 2025 through December 31, 2028; contributions from July 4, 2026, up to $5,000 a year (indexed after 2027); employer contributions up to $2,500 a year excluded from wages (Section 128), counting toward the $5,000 |
| Adoption credit | Up to $17,670 of expenses for 2026; up to $5,120 of the credit is refundable ($5,000 for 2025) |
| 529 plans | Expanded K–12 and credentialing uses |
What can a business owner do through the business?
- Dependent care assistance through a written plan for employees — sole proprietors, partners, and more-than-2-percent S corporation shareholders can be covered (though not through cafeteria plan salary reduction), but no more than 25 percent of the benefits may go to more-than-5-percent owners, so an owners-only plan fails.
- Employer contributions to Trump accounts for employees' children, excluded from wages up to $2,500 under a written Section 128 program that meets nondiscrimination rules; owner-employees of a C corporation can participate.
- Hiring the child later, once there is real work to do.
- Health coverage for the family, deductible through the self-employed health insurance rules.
What should be done in the first weeks?
Get the child's Social Security number (apply at the hospital); update Form W-4 withholding or the owner's estimated taxes; add the child to health coverage within the enrollment window; file Form 4547 to open the Trump account and claim the $1,000 pilot deposit, and open a 529 if desired; and if a single parent, check head of household status.
How do the credits interact with business income?
The child tax credit phases out at $200,000 of modified adjusted gross income ($400,000 joint), so a good year can reduce it. The dependent care credit requires earned income from both spouses (or one spouse and a student or disabled spouse); self-employment income counts. Excluded dependent care assistance reduces the $3,000/$6,000 credit expense limit dollar for dollar, so $6,000 or more of plan benefits leaves nothing for the credit.
Frequently asked questions
Can I claim the child tax credit for a baby born in December?
Yes. A child born at any time during the year qualifies for the full credit.
Is a Trump account the same as a Roth IRA for a child?
No. It is a traditional-IRA-type account under Section 530A with its own contribution limits, a low-cost U.S. stock index fund requirement, and no withdrawals before the year the child turns 18; a child needs earned income for a Roth IRA.
Can my spouse's employer plan and my business plan both pay for child care?
The $7,500 dependent care assistance limit is per household on a joint return ($3,750 each if married filing separately), not per plan.
Does a 529 contribution reduce my business income?
No. Contributions are personal, after-tax; there is no federal deduction and Florida has no income tax.
Official sources
The IRS explains: “The Child Tax Credit is worth up to $2,200 per qualifying child. If you have little or no federal income tax liability, you may qualify for the Additional Child Tax Credit, up to $1,700 per qualifying child depending on your income.” — Internal Revenue Service, Child Tax Credit, https://www.irs.gov/credits-deductions/individuals/child-tax-credit
The IRS explains: “The credit is calculated based on your income and a percentage of expenses that you incur for the care of qualifying persons to enable you to go to work, look for work, or attend school.” — Internal Revenue Service, Child and Dependent Care Credit information, https://www.irs.gov/credits-deductions/individuals/child-and-dependent-care-credit-information
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk updates withholding and estimates and sets up the accounts in the child's first months. See pricing or book a free fit call.
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