When you get that positive sign on your pregnancy test, you are over the moon. It's totally natural, however, to then easily slip into panic mode, especially if you're a working mom. You know your life is about to change in a big and joyous way, but changes are scary, especially if you've worked hard to climb the corporate ladder. Chances are you're going to need to take time off work, so you need to know how maternity leave will affect your taxes. Unfortunately, this is a very confusing issue, because there isn't a uniform system in place to support working mothers and their families financially. If you've been following the race to the White House, you know that a plan for federal paid maternity leave is one of the major issues candidates are talking about, and for good reason. Legislation regarding maternity leave is currently provided by the Family and Medical Leave Act of 1993.
I've read over the FMLA, and though I'm no accountant, what I took from this legislation is that it favors companies and corporations over employees. For example, the FMLA only requires employers to provide 12 weeks of unpaid family leave if the company has over 50 employees, according to Forbes. So if you work for a company with less than 50 employees you're not legally entitled to the 12 weeks. But, unpaid maternity leave is not the only way to take time off for caring for your new family. While that's good news, it can also be confusing come tax time.
Researching this article had me downright scratching my head, so I can only imagine how hard it must be for moms-t0-be or new moms filing their taxes right now. Hopefully, these tips will help clarify how maternity leave will affect your taxes.
1. If You Took Short-Term Disability Leave
Sarah Nieschalk, an Enrolled Agent at Tax Defense Network helped me figure out this option. She tells Romper, "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 pretax premium." 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.
2. If You Took Unpaid Maternity Leave
However, there is often at least a small silver lining to unpaid maternity leave. Shannon McNulty of Savvy Parents, an NYC-based attorney who is also a Certified Financial Planner, tells Romper, "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. 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 says, "You’ll get the difference back in the form of a refund when you file your taxes with the IRS." So, while unpaid maternity leave feels discouraging, the tax refund helps, somewhat.
3. If You Took Paid Maternity Leave Or Paid Family Leave
Lucky you! In this case, McNulty explains, "Your time off will have no effect at all on your taxes." FYI, if you live in California, 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!
4. If You Used Sick, Vacation, Or Holiday Time
According to the American Pregnancy Organization, most companies allow you to pool different types of leave when you're pregnant and/or a new mom. So, that means you can use your sick, vacation, or holiday time to cover your time off caring for your little one. 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.
5. When You're "In Loco Parentis" According To The IRS
I thought this was a cool nugget of info provided by the FMLA and recognized by the IRS. Did you know that you're entitled to take maternity leave if you're an "in loco parentis"? According to the FMLA, this means you're an "individual who has day-to-day responsibility for the care and financial support of a child or, in the case of an employee, who had such responsibility for the employee when the employee was a child. A biological or legal relationship is not necessary." Boom! Pretty cool, and another reason to read the fine print, even if it is in Latin.
6. 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 (to go-to source for the IRS when it comes to this stuff), 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.
7. 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. You get oodles of tax breaks for having a baby. "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 tells Romper.
As a working mom, you know that every penny counts. So, be sure to consult with an accountant to make sure you can take advantage of all the tax breaks of having your "dependent." While dealing with maternity 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 mom you are.