Imagine you are about to embark on one of the most thrilling and challenging adventures of your life: becoming a parent. You have prepared yourself for the physical, emotional, and practical changes that come with having a baby, but have you considered the financial ones?
- How may your pregnancy and new child affect your income, expenses, and taxes?
- What are the tax benefits and obligations that you may qualify for or have to comply with?
- How can you plan ahead and optimize your tax situation to make the most of your money and your time?
If these questions above are your worries, don’t fret. These are some of the questions that this article explores. Whether you are expecting a child, have recently given birth, or have experienced a pregnancy loss, this article provides you with some useful information and tips on how to navigate the complex and ever-changing tax rules that apply to you and your family. It covers topics such as family leave, medical expenses, tax credits, exemptions, state and local taxes, self-employment taxes, and more. So what are you waiting for? Dive in now!
- Tax Implications for Family Leave
- Tax Implications for Medical Expenses
- Tax Credit for Pregnancy
- State And Local Tax Implications
- Exemptions
1. Tax Implications for Family Leave
Think of family leave as the time that you take off from work to have a baby or take care of your baby. Depending on how your employer pays you during your family leave, you may have different tax implications. For instance, If you take unpaid family leave, it means that you do not receive any money from your employer or the government while you are away from work.
This may lower your income for the year, while it can give you a higher chance of claiming larger tax credits, such as the Child Tax Credit or the Earned Income Tax Credit. With these tax credits, you can reduce the amount of taxes that you owe or increase the amount of refund that you get. You may also get a refund if your employer withholds too much taxes from your paychecks based on your full year’s salary.
On the contrary, if you take paid family leave, it means that you receive some money from your employer, the government, or a private insurance plan while you are away from work. However, be aware that this money is usually taxable and you have to include it in your income.
Be ready to pay taxes on the benefits that you receive, depending on the source and amount of the payments. For example, if you receive Maternity Benefit from the government, it is taxable and you have to report it on your tax return. If you receive payments from your employer or a private insurance plan, they may also be taxable and subject to withholding
2. Tax Implications for Medical Expenses
Know that your medical expenses include the costs of diagnosis, treatment, prevention, or cure of a physical or mental illness or injury. Medical expenses include payments to doctors, hospitals, pharmacies, laboratories, and other health care providers. Medical expenses also include the costs of health insurance premiums, transportation to and from medical care, and medical equipment and supplies.
According to the IRS, you can deduct the amount of medical expenses that exceed 7.5% of your adjusted gross income (AGI) in the year you incur them. For example, if you have an AGI of $50,000 and medical expenses of $10,000, you can deduct $6,250 ($10,000 – 7.5% x $50,000) as an itemized deduction on Schedule A of Form 1040.
Note that your pregnancy-related medical expenses are deductible as long as they meet the general criteria of being necessary and reasonable for the diagnosis, treatment, prevention, or cure of a physical or mental illness or injury. Pregnancy-related medical expenses may include:
- Prenatal care, such as visits to the obstetrician, ultrasounds, blood tests, and genetic screenings.
- Delivery, such as hospital fees, anesthesia, cesarean section, and postnatal care.
- Complications, such as miscarriage, abortion, ectopic pregnancy, or infertility treatment.
- Breastfeeding, such as breast pumps, nursing bras, and lactation consultants.
To claim the deduction for medical expenses, keep records of your payments and receipts, and list them on Form 1040, Schedule A, Line 1. Also, complete Form 1040, Schedule A, Line 2, to calculate the 7.5% limit based on your AGI. You must also attach Form 1095-A, Health Insurance Marketplace Statement if you receive health insurance through the Marketplace.
3. Tax Credit for Pregnancy
Do you know that a tax credit is a dollar-for-dollar reduction of your tax liability? Yes, a tax credit can be refundable or nonrefundable. Request for a refund if your tax credit exceeds your tax liability. On the contrary, a nonrefundable tax credit can only reduce your tax liability to zero.
One of the tax credits that may benefit you if you are a parent who is expecting or has a new baby is the Child Tax Credit (CTC). The CTC is a refundable tax credit that provides up to $2,000 per qualifying child under the age of 17. A qualifying child must meet the following criteria:
- Be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them
- Have a Social Security number that is valid for employment and issued before the due date of the tax return
- Be a U.S. citizen, U.S. national, or U.S. resident alien
- Live with you for more than half of the year
- Not provide more than half of his/her support
- Do not file a joint return with another you, unless it is only to claim a refund
Can you imagine that you can claim the CTC for your unborn child if you give birth to the child by the end of the tax year? For example, if you give birth to a child on December 31, 2023, you can claim the CTC for 2023.
To claim the CTC, you must complete Form 1040, Line 19a, and attach Schedule 88, Additional Child Tax Credit, if you are eligible for the refundable portion of the credit. Also, provide the name, date of birth, and Social Security number of each qualifying child on Form 1040, Line 19b.
4. State And Local Tax Implications
Keep in mind that state and local tax implications for pregnancy may vary depending on the state and locality where you live and work. Depending on your state and locality, you can enjoy some tax benefits or incentives, such as:
- State or local income tax credits or deductions for child care, adoption, or dependent care expenses
- State or local sales tax exemptions or refunds for certain items related to pregnancy, such as diapers, formula, or clothing
- State or local property tax exemptions or reductions for families with children
- State or local tax credits or rebates for energy-efficient home improvements or appliances that benefit families with children
>>>PRO TIPS: Understanding Progressive, Regressive and Flat Taxes
5. Exemptions
Think of an exemption as an amount of your income that is not subject to tax. An exemption reduces your taxable income and your tax liability. For 2023, the personal exemption amount is $0, meaning that you cannot claim an exemption for yourself or your dependents.
However, you may still be eligible for other tax benefits related to your dependents, such as the CTC, the Child and Dependent Care Credit, the Earned Income Tax Credit, the Adoption Credit, and the Education Credits.
>>>GET SMARTER: Energy Tax Credit: Which Home Improvements Qualify?
Recap
Remember that pregnancy can have various tax implications for you, depending on your income, expenses, and tax credits. Keep track of your pregnancy-related medical expenses, claim the CTC for your unborn or new child, and research the state and local tax implications for your location.
Moreover, consult a tax professional if you have any questions or need assistance with your tax return. By understanding and planning for the tax implications of pregnancy, you can maximize your tax benefits and minimize your tax liability.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. . For comprehensive tax, legal or financial advice, always contact a qualified professional in your area. S’witty Kiwi assumes no liability for actions taken in reliance upon the information contained herein.
No Comment! Be the first one.