Tax Season

woman punching numbers into calculator while sitting at dining table with infant in her lap
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How Does Family Leave Affect Your Taxes?

Seven things parents should know if they took paid or unpaid family leave.

Originally Published: 

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 the 2021 taxes you file in 2022 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 States, tells Romper.

Currently, the United States is the only industrialized nation that doesn’t offer mandatory paid family leave, 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 child tax credits, tax season gets overwhelming fast. If you’re feeling in over your head, the following tips will help clarify how family leave will affect your 2021 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. “If the leave is unpaid, it shouldn't impact on someone's taxes, except for the fact that their income might be lower, so they might be eligible for/receive larger ‘family’ tax credits like the Child Tax Credit or the Earned Income Tax Credit in 2021,” Amy Matsui, Director of Income Security at the National Women’s Law Center tells Romper.

In some cases, your employer may have withheld taxes based on your full year’s salary which can result in excess withholding (basically taxes take out for time you did not work). The good news? “You’ll get the difference back in the form of a refund when you file your taxes with the IRS," Shannon McNulty, an NYC-based attorney and certified financial planner, and owner of Savvy Parents, tells Romper

The unfortunate reality of taking maternity leave while freelancing is that your salary is likely to be lower than the year before. “Going on parental leave while freelancing likely means you didn’t have a consistent income throughout the year. Your income may be lower than the year before, which may qualify you for the Earned Income Tax Credit,” Kathy Pickering, chief tax officer at H&R Block tells Romper. “You may find yourself in a lower tax bracket, and you may also have a new dependent on your taxes and new child-related tax benefits like the child tax credit. If you didn’t adjust your quarterly payments to reflect a lower estimated adjusted gross income, your refund could be larger than it usually is.”

So, while unpaid family leave feels discouraging, the tax refund helps, somewhat.


If You Took Short-Term Disability Leave

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"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 received Advance Child Tax Credit payments

Many American families received Advance Child Tax Credit (ACTC) payments in July through Dec. of 2021, and you’ll notice some changes to your taxes if you did. “When you file your 2021 return, you’ll need to report any advance received, which will allow you to determine and claim the remaining credit available to you. Advance payments were based on children you claimed on your 2020 tax return. If you claim a new qualifying child for 2021, you’ll claim the full amount of your allowable child tax credit on your 2021 tax return,” Pickering says. Look out in the mail for IRS letter 6419 (if you haven’t already received it); the letter contains info on your ACTC payments that you’ll need to include when filing your 2021 taxes.

So if you had a baby in 2021, don’t forget to claim the new addition on your tax return as you may be eligible for ACTC repayment. You’re also eligible for this credit even if you own no taxes which is a change from previous years. “​​As part of changes from the March 2021 stimulus bill, the value of the Child Tax Credit as well as the age limit have increased,” Pickering tells Romper. “For tax year 2021, the Child Tax Credit increased from $2,000 per qualifying child to:

  • $3,600 for children ages 5 and under at the end of 2021; and
  • $3,000 for children ages 6 through 17 at the end of 2021

The CTC is now fully refundable, which means you can receive the credit even if you don’t owe any money to the IRS.”


If You Took Paid Maternity Leave Or Paid Family Leave

Lucky you, your taxes will be pretty straightforward. In this case, Matsui says that “if the leave is paid, whatever the person was paid counts as income, and the person will pay income taxes on that amount along with their other sources of income.” Basically, your time off will not affect your taxes assuming you were paid your normal salary.

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. This money is taxed just like your salary.


If You Used Sick, Vacation, Or Paid Family Time

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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’s 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"

You know your kid is dependent on you (in every sense of the word), but, again, this is a legal term that can give you a cash bonus. "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.

And if you did not receive any Advance Child Tax payments in 2021 but you had a baby and met the other eligibility requirements, you are still entitled to that money.

“If you became eligible in 2021 (for example, because of the birth or adoption of a qualifying child), but didn’t receive advance Child Tax Credit payments for that qualifying child, you may claim the full amount of your allowable Child Tax Credit for that child when you file your 2021 tax return,” per the IRS website.

Tax season is always confusing, but add sleep deprivation, Advance Child Tax Credits, and maternity leave to the equation and things get muddy fast. While it’s helpful to learn as much as possible on your own, you may want to enlist the help of a professional if you can to assure that all your information is correct (and therefore your refund comes quickly, without any delays).

“Work with a tax pro to make sure you file your taxes correctly and to see if you should make any withholding adjustments before next year,” Pickering says. “Using mobile banking platforms, such as H&R Block’s offering in Spruce, is a good way to prepare and plan for any tax and financial adjustments you need to make for the future.”

Additional Reporting by Jill Di Donato


Amy Matsui, Director of Income Security at the National Women’s Law Center

Kathy Pickering, chief tax officer at H&R Block

Jonathan Meadows, certified public accountant, Meadows CPA, PPLC

Shannon McNulty, New York City-based attorney and certified financial planner, Savvy Parents

Neil Sroka, communications director with PL+US: Paid Leave for the United States

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