Flying with a 1yr old & Clearing Customs

You are either taking Wow or Icelandic air,

You will not see the bag you checked in JFK until your final destination Amsterdam.

The 2 hour connection is enough. The bag you check on the way back will go all the way to JFK.

If you fly a lot internationally then paying the price for 3 people and going through the process of Global Entry makes sense.

You go through passport control in KEF coming and going. The border control people behind the glass will just scan and then stamp your passport.

Customs is after you collect your checked bag from the carsousel in Amsterdam and JFK.

Customs has nothing to do with border control aka passport control.

Many people use "customs" and "passport control" interchangeably on this forum - they are two different things. This is the definition of customs clearance - it has to do with import and export of goods (or money exceeding some large amount like 10k) for which you will file an attestation form while on the flight. It's the last thing you do before you exit - you either declare something to the customs agent on your form that needs further inspection... or not. You give that person your filled out form. It has nothing to do with running your passport through a database to gain entry to another country (that's known as "passport control").

"Customs is the authority in the respective country you enter that is responsible for controlling the flow of goods, including animals, transports, foods, personal effects, and hazardous items, into and out of a country."

Since you said 2 hour connection AT JFK, it appears you have an onward flight from NY. This answer describes changing to a US flight after arrival at JFK.

Coming back you will go through passport control at JFK. Next you pick up your luggage and go through customs. Finally, if all your flights are on one ticket, you turn your luggage back in for your continuing flight. The airlines will transfer your luggage. You will have a security clearance if your flight is in the same terminal. If you change terminals, your security will be there. Changing terminals, you might or might not make the flight. You need to be boarded long before take off.

If your US connecting flight isn’t booked on the same ticket, you will need to exit the terminal with your luggage and go check in. You won’t have enough time with only 2 hours. If You miss the US flight, you’ll need to buy a walk-up ticket.

Be careful with an itinerary slapped together with different airlines by an on-line vendor. You risk not being protected if you miss the US flight. If it is all booked via one airline that uses partners, and directly with the airline, you are protected if you miss the US flight.

Immigration (passport control), customs, and security are three different things, but people in the US often say "customs" to mean all of them. However, to avoid confusion, it's important to understand the differences. Customs is about goods, passport control is about people, and security can involve either one.

For your departure: When you check in at JFK, your checked bags will be tagged "AMS" (make sure of this). You will then not see them until you get to Amsterdam. You will then go through security, then to your gate. There is no customs or passport control at this stage.

In KEF you will go through immigration (your passport will be stamped). This is your entry into the Schengen zone, a group of countries that have agreed to abolish routine border checks (so, once you're in, you don't usually have to checked again as long as you stay in). Both Iceland and the Netherlands are in this zone.

You will then go to your next gate for your flight to AMS. Again, no customs. I don't know if there is security screening when changing planes at KEF (the layout in each airport is different, and I haven't used KEF).

In AMS, you will pick up your bags and go through customs. However, in Europe customs is merely a matter of walking through the Green Channel Nothing To Declare line. Unless you're "randomly selected for additional screening" (possible but rare), you're done, and are free to exit the airport.

For your return: When you check in in Amsterdam, your checked bags will be tagged "JFK" (again, make sure they are). You will then not see them until New York. You then go through security to get to your gate for your flight to KEF.

At KEF, you will go through passport control (this time it's emigration, as you are leaving the Schengen zone). Again, I don't know if there is security when changing planes there, but there is no customs.

At JFK, you will go through passport control, then pick up all your checked luggage, then go through customs. Here you have to hand a form to a customs officer (you'll get the form on the plane - keep a pen handy), and the officer will look at it. The officer may just wave you through, or may ask you some questions, or may pull you aside for further screening (once in San Francisco, they opened all my luggage and went through it thoroughly). Once you're done with this, you go through the opaque doors, and are officially "back" in the US.

EDIT: Cross posting with some of the above replies, so you see I repeated some things.

Thank you all! I really appreciate your explanations.

We are travelling on Icelandair with one ticket all the way through.

Global Entry is not a pass. It's tied to your passport. You still go through immigration but you do most on a machine then hand it to an agent. No real waiting.

However, going through the Global Entry process is doubtful in two months. You will get conditional approval fairly quickly but you then have to schedule an interview and that could take a long time.

No need to get Global Entry. They now have a mobile phone app that is as good and it is free. It is called Mobile Pass. You download the app and follow the directions. Scan your passport or enter in passport number and information. You can do your whole family on one phone. You have to take a picture to store with each passport you enter in.
When you are returning home, you access the app, put in the returning city and airline, answer the customs questions. At this point I minimize the app. When you get off the plane and have mobile or wifi service, you hit submit and the app will return a QR code for each passport. Get in the Mobile Pass line and you are through in no time. Lately, I have made it through using Mobile Pass quicker than my sister using Global Entry.

Keep your QR code up on your phone as they will ask to see it at Customs.