As your life changes, so does the set of tax rules that affect you. Read about new tax opportunities to embrace and pitfalls to avoid as your life changes.

The birth of a child guarantees major changes in your lives… as parents and as taxpayers. Over the years, Congress has peppered the law with tax breaks to help American families. Considering the high cost of child rearing in the 21st Century, you'll need all the help you can get.

Get a Social Security number

Your key to tax benefits is a Social Security number. You'll need one to claim your child as a dependent on your tax return. Failing to report the number for each dependent can trigger a $50 fine and tie up your refund until things are straightened out.

You can request a Social Security card for your newborn at the hospital at the same time you apply for a birth certificate. If you don't, you'll need to file a Form SS-5 with the Social Security Administration and provide proof of the child's age, identity and U.S. citizenship. If registering newborns strikes you as silly, keep in mind that the aim is to prevent taxpayers from claiming dependents they don't deserve (think parakeets and puppies). Apparently it's working. In the first year the government required the numbers, 7 million fewer dependents were claimed than the year before.

Dependency exemption

Claiming your son or daughter as a dependent will shelter $3,400 of your income from tax in 2007, saving you a quick $850 if you're in the 25% bracket. (The exemption is worth $3,300 on 2006 returns.) You get the full year's exemption no matter when during the year the child was born. Top-earning taxpayers – those reporting 2007 adjusted gross incomes over $234,600 on joint returns, $156,400 on individual returns or $195,500 for heads of households – gradually lose the tax-saving power of exemptions. Regardless of your income, if you are hit by the alternative minimum tax, exemptions lose all of their tax-saving value.

$1,000 child credit

A new baby also delivers a $1,000 child tax credit, and this is a gift that keeps on giving every year until your dependent son or daughter turns 17. You get the full $1,000 credit no matter when during the year the child was born. Unlike a deduction that reduces the amount of income the government gets to tax, a credit reduces your tax bill dollar for dollar. So, the $1,000 child credit will reduce your tax bill by $1,000. The credit is phased out at higher income levels, beginning to disappear as income rises above $110,000 on joint returns and above $75,000 on single and head of household returns. For some lower-income taxpayers, the credit is "refundable," meaning that if it more than exceeds income tax liability for the year, the IRS will issue a refund check for the difference.

Fix your withholding at work

Since claiming an extra dependent will cut your tax bill, it also means you can cut back on tax withholding from your paychecks. File a new W-4 form with your employer to claim an additional withholding "allowance." For a new parent in the 25% bracket, that will cut withholding – and boost take-home pay – by about $70 a month. You can also take the child credit into account on your W-4, pushing withholding down even more.

Filing status

If you are married, having a child will not affect your filing status. But if you're single, having a child may allow you to file as a head of household rather than using the single filing status. That would give you a bigger standard deduction and more advantageous tax brackets. To qualify as a head of household, you must pay more than half the cost of providing a home for a qualifying person—and your new son or daughter qualifies.

Earned income credit

For a couple without children, the chance to claim this credit disappears when income on a joint return approaches $15,000. Having a child, though, pushes the cut off to about $35,000; and if you have two or more children, you can earn almost $40,000 and still have a crack at this credit.

Child care credit

If you pay for child care to allow you to work – and earn income for the IRS to tax – you can earn a credit worth between $600 and $1,050 if you're paying for the care of one child under age 13 or between $1,200 and $2,100 if you're paying for the care of two or more children under 13. The size of your credit depends on how much you pay for care (you can count up to $3,000 for the care of one child and up to $6,000 for the care of two or more) and your income. Lower income workers (with adjusted gross income of $15,000 or less) can claim a credit worth up to 35% of qualifying costs and the percentage gradually drops to a floor of 20% for taxpayers reporting AGI over $43,000.

Childcare reimbursement account

You may have an even more tax-friendly way to pay your childcare bills than the child care credit: a childcare reimbursement account at work. These accounts, often called flex plans, let you divert up to $5,000 a year of your salary into a special account that you can then tap to pay child care bills. Money you run through the account avoids both federal income and Social Security taxes, so it could easily save you more than the value of the credit. You can't double dip, by using both the reimbursement account and the credit. But note that while the limit for flex accounts is $5,000, the credit can be claimed against up to $6,000 of eligible expenses if you have two or more children. So, even if you run $5,000 through a flex account, you could quality to claim the 20% to 35% credit on up to $1,000 more.

Although you generally can only sign up for a flex account during "open season," most companies allow you to make mid-year changes in response to certain "life events" and one such event is the birth of a child.

Adoption credit

There's also a tax credit to help offset the cost of adopting a child. The credit is worth as much $11,390 in 2007 and, if you adopt a "special needs" child, you can claim the full credit even if you spend less than $11,390. This credit phases out as adjusted gross income rises from $170,820 to $210,820.

Save for college

It's never too early to start saving for those college bills. And it's no surprise the Congress has included some tax goodies to help parents save. One option is a Section 529 state education savings plan. Contributions to these plans are not deductible, but earnings grow tax free and payouts are tax free, too, if the money is used to pay qualifying college bills. (Many states give residents a state tax deduction if they invest in the state's 529 plan.) You may also want to fund a Coverdell education savings account (ESA) for your newborn. Up to $2,000 a year can go into an ESA for any beneficiary. Again there is no deduction for deposits, but earnings are tax free if used to pay education expenses. And, ESA money can pay for elementary and high school expenses (even a computer used for school and educational software) as well as for college costs. The right to contribute to an ESA phases out as income rises from $95,000 to $110,000 on single returns and from $190,000 to $220,000 on joint returns.

Kid IRAs

You may have heard about kid IRAs and the fact that relatively small investments when a child is young can grow to eye-popping balances over many decades. And, it's true. But there's a catch. You can't just open an IRA tax shelter for your newborn and start shoveling in the cash. A person must have earned income from a job or self-employment in order to have an IRA. Gifts and investment income don't count. So, you probably can't open an IRA for your newborn (unless, perhaps, he or she gets paid for being an infant model). But, as soon as your youngster starts earning some money – babysitting or delivering papers, for example, or helping out in the family business – he or she can open an IRA. The phenomenal power of long-term compounding makes it a great idea.

Kiddie tax

The graduated nature of the income tax rates – with higher tax rates on higher incomes – creates opportunities for savings if you can shift income to someone (a child, perhaps) in a lower tax bracket. Let's say Dad has $1,000,000 invested in bonds paying $50,000 of taxable interest each year. As a resident of the 35% tax bracket, that extra income hikes his tax bill by $17,500. But, if he could divvy up the money among five children, each of whom earned $10,000 that would be taxed in the 10% bracket, the family could save $12,500 in tax. Forget it! To prevent such shenanigans, Congress created the kiddie tax to tax most investment income earned by a dependent child at the parents' top tax rate. For 2007, the first $850 of a child's "unearned" income (that's income that's not earned from a job or self employment) is tax-free and the next $850 is taxed at the child's own rate (probably 10%). Any additional income is taxed at the parents' rate… as high as 35%. The kiddie tax applies until the year a child turns 18. After that, all income is taxed at his or her own rate.

Nanny tax

If you hire someone to come into your home to help care for your new child, you could become an employer in the eyes of the IRS and face a whole new set of tax rules. If you hire your nanny or caregiver through an agency, the agency may be the employer and have to take care of all the paperwork. But if you're the employer – and you pay more than $1,500 a year – you're responsible for paying Social Security and unemployment taxes for your caregiver, and reporting the wages you pay to the government on a W-2 form.