Family leave brings up mixed emotions for many parents. Maybe you’re worried it will be hard to take a step back from work, or you’re excited for the time with your baby, but you’re anxious about missing wages. Knowing how maternity or paternity leave can affect your taxes can help you feel more informed and in control, whether you plan on taking paid or unpaid leave.
How family leave affects your taxes will largely depend on where you live and the laws in that specific state. “[This] is one of the reasons why passing a federal paid leave policy is so important — the current patchwork of paid leave policies is often confusing to utilize at best and, more often than not, entirely absent,” Neil Sroka, communications director with PL+US: Paid Leave for the United State, tells Romper.
Currently, the United States is the only industrialized nation that doesn’t offer mandatory paid family leave, per The Washington Post (though you may get it if you live in a state with a paid leave policy). “To the extent an employer pays for benefits, the maternity leave would be taxable,” Jonathan Meadows, a certified public accountant, tells Romper.
Life with a new baby and tax season are confusing enough on their own, but when you combine the two factors, then throw in a global pandemic plus income from potential stimulus checks, tax season gets overwhelming fast. If you’re feeling in over your head, the following tips will help clarify how family leave leave will affect your 2020 taxes.
If You Took Unpaid Family Leave
Taking unpaid leave is never ideal, however, there is often at least a small silver lining to unpaid family leave. "Your employer withholds taxes from your paycheck based on your full yearly salary, even if you take unpaid time off to care for your new baby,” Shannon McNulty, an NYC-based attorney certified financial planner, and owner of Savvy Parents, tells Romper. “This can result in excess withholding, meaning that your employer is withholding a higher amount in taxes from your paycheck than you will actually owe at the end of the year." But, she continues, “you’ll get the difference back in the form of a refund when you file your taxes with the IRS." So, while unpaid family leave feels discouraging, the tax refund helps, somewhat.
And what if you’re self-employed or an independent contractor? “If you receive maternity leave as a freelancer, it’s taxed in the same way as if you received any other freelance income,” Gail Perry, CPA, Editor-in-Chief, CPA Practice Advisor/Tax Practice Advisor tells Romper. Many freelancers will take unpaid leave, but if you’re able to work out a situation where your client will be paying you for leave, be sure to set aside taxes as normal.
If You Took Short-Term Disability Leave
"Your pregnancy leave may be covered by your employer, inasmuch as you can receive short-term disability income. Additionally, your premium or disability payments — one or the other — will be taxed. If you really want to plan ahead (and have this option) you can use deductions from your wages, set up through your payroll department, to cover the cost of a pre-tax premium,” Sarah Nieschalk, the assistant vice president of servicing at Community Tax, LLC, tells Romper, So, planning is really key, as is an open discussion with your employer about your pregnancy, so you can make the wisest fiscal decisions for you and your family. In some cases, pregnancy is considered a pre-existing condition, per Breeze, so you may want to consider really planning ahead by signing up for short-term disability before you’re pregnant.
If You Got A Stimulus Check
Covid hasn’t changed much about taxes and maternity leave, Perry tells Romper, though there are stimulus check payments to consider. “If the baby was born before the stimulus payment legislation went into effect, the child will qualify for a stimulus payment. If the parents didn’t receive this payment, they can claim it on their 2020 income tax return,” she says. Qualifying families with children under 17 were eligible for an extra $600 in stimulus checks, per Forbes.
If You Took Paid Maternity Leave Or Paid Family Leave
Lucky you! In this case, McNulty says that “your time off will have no effect at all on your taxes." And, if you live in the handful of states that have enacted paid family leave (PFL) including California, New Jersey, Rhode Island, and New York, you are entitled by law to paid family leave, but you don't have to do anything different on your taxes here. These monies are taxed just like your salary. Yay!
If You Used Sick, Vacation, Or Paid Family Time
If you are not offered paid time off through your employer, or your employer isn’t mandated to offer paid family leave, you can use your sick, vacation, and/or holiday time. “Typically people try to save up their vacation and sick time, and then use it to cover all or part of the time they’re on leave,” Alison Green wrote for The Cut. “For example, if you’re accrued three weeks of sick time and three weeks of vacation time, you could use those six weeks as part of your maternity leave, ensuring you’d be paid for that portion of it.”
The good news here is that come tax time, "Your compensation will be taxed exactly the same way that it would be if you hadn’t taken maternity leave," explains McNulty. Even though you're not sick, on vacation, or on holiday. But whatever. Semantics for now, until the system gets overhauled.
The IRS' Definition Of A Child
I know this sounds, um, weird, defining a child and all, but this is the government, people. Again, drawing from the FMLA, the IRS defines a child as "a biological, adopted or foster child; a step child; a legal ward; or a child of a person standing in loco parentis who is under 18 years of age or 18 years or older and incapable of self-care because of mental or physical disability." And you thought your new bundle was your pride and joy who you've been sleep training for the past couple months. Your child is now your legal dependent.
Tax Benefits Of Having A "Dependent"
OK, you know your kid is dependent on you. But, again, this is a legal term that can give you a cash bonus. Seriously. "As a new parent, you likely qualify for some attractive tax breaks next year. Your new addition counts as a dependent and you can also deduct childcare costs incurred while you were working," Nieschalk says.
“Once you have a dependent, the parents are entitled to claim a dependent exemption on their federal income tax return which reduces taxable income. For 2020, the amount is $4,300, and that is not prorated, so even if the child was born on 12/31/2020, the exemption is $4,300,” Perry tells Romper and adds that this amount is used to reduce taxable income on Form 1040 and most state tax returns offer similar savings.
There is also a Child Tax Credit available on federal income tax returns, Perry explains. It’s up to $2,000 per qualifying child, and this is available for newborns as well. “Instead of being deducted from your income, the credit is applied against your tax, and up to $1,400 of the credit is refundable. That means that even if you have no tax, you can claim a refund of up to $1,400 from the Child Tax Credit,” Perry says.
While dealing with unpaid and paid family leave taxation might have been a nightmare, now comes the good part: use the spoils for Junior's college fun, or to treat yourself for being the awesome, tax-season-dominating mom that you are.
Sources:
Gail Perry, CPA, Editor-in-Chief, CPA Practice Advisor/Tax Practice Advisor
Jonathan Meadows, certified public accountant, Meadows CPA, PPLC
Sarah Nieschalk, assistant vice president of servicing, Community Tax, LLC
Shannon McNulty, New York City-based attorney and certified financial planner, Savvy Parents
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