Welcoming a new baby into your family is full of special moments & memories. It can also raise lots of new financial questions.
DOES IT MAKE SENSE FINANCIALLY FOR BOTH ME ANDY MY SPOUSE TO WORK AFTER OUR CHILD IS BORN?
Following the birth of your child, you may feel that both you and your spouse need to work to meet household expenses and maintain your current lifestyle. However, you may discover that one of you can stay home without seriously affecting your net income. Though you would have to do without a second income, you need to factor in what you’d save:
- Child-care costs: The cost per child for a day-care facility, nursery school, or nanny
- Commuting costs: Gasoline, wear and tear on your car, tolls, and parking
- Clothing: Work clothes and dry cleaning
- Restaurant and take-out food: Prepared dinners you purchase because you have no time to cook
- Lunches out: You have more time to prepare your own
- House cleaning and gardening: Hired help to clean the house and mow the lawn
- Taxes: With only one salary, you may move into a lower tax bracket
Now, consider the adverse effects of becoming a single-income household. The most obvious, of course, is a reduced family income. You should also consider what effect a leave of absence will have on the stay-at-home spouse’s career and your family’s retirement plans. You may both be at a point in your careers where you are earning high salaries. Leaving your job now may mean having to start over lower on the career ladder. And if one of you leaves work, you may miss the opportunity to fully fund your employer-sponsored retirement plan. Further, with only one income, you are more vulnerable in the event of an economic downturn. Finally, the stay-at-home spouse may lose the sense of accomplishment and community one gets from working outside the home.
You should balance all the issues, both pro and con. And remember, although it may make sense for both of you to continue working, some nonfinancial considerations, such as the opportunity to raise and supervise your child in your own home, may outweigh your financial concerns.
AFTER MY CHILD IS BORN, DOES THE LAW SAY I AM ENTITLE TO THREE MONTHS LEAVE?
The law you’re referring to is known as the Family and Medical Leave Act (FMLA). It entitles you to take up to 12 weeks of unpaid leave to care for your new child, but only if you work for a covered employer and meet certain eligibility criteria. Under this law, while you’re on leave, your employer-sponsored health insurance benefits are protected, and your employer must return you to the same job or a similar job when you come back to work.
You may be covered under the FMLA if
- You work for a private company that has 50 or more employees, or you work for a public school or agency that has less than 50 employees, and
- You have worked at least 12 months (not necessarily consecutively) for that employer, and you have worked at least 1,250 hours during the 12 months immediately preceding your FMLA leave start date
Even if you are covered by the FMLA, your employer can require you to use any vacation days, sick days, or personal days you’ve accumulated in place of unpaid leave time. For instance, if you’ve accumulated two weeks of vacation time, your employer can ask you to use those weeks first, before giving you an additional 10 weeks of unpaid leave. You’re also required to give your employer at least 30 days’ notice of your need for leave, or as much notice as possible, depending on the circumstances.
You should also check the rules of your state, because some states have their own parental leave rules and may pay disability benefits to new mothers. However, if you’re not covered by any law, there’s not much you can do, unless you can negotiate more leave time with your employer.
CAN I TAKE THE TAX CREDIT FOR CHILD CARE?
The child and dependent care credit is a tax credit for up to 35 percent of certain expenses you paid to provide care for your dependent child, your disabled spouse, or a disabled dependent while you worked or looked for work. To be eligible for the credit, you must care for a qualifying person, incur work-related expenses, and have earned income.
A qualifying person is:
- Your dependent who was under the age of 13 when the care was provided and for whom you can claim an exemption, or
- Your dependent who was physically or mentally unable to care for himself or herself and for whom you can claim an exemption (or for whom you could have claimed an exemption but for the income test), or
- Your spouse who is physically or mentally unable to care for himself or herself, or
- In certain cases, a dependent claimed by a divorced spouse
Child and dependent care expenses must be work related to qualify for the credit. That is, the expenses must allow you to work or look for work. If you are married, you must file a joint tax return and both you and your spouse must generally work or look for work. (Your spouse is treated as working during any month he or she is employed, or is a full-time student, or is physically or mentally unable to care for himself or herself.)
Your child and dependent care credit is a percentage of a portion of your work-related expenses. The qualifying expenses on which the tax credit is based are limited to $3,000 for one qualifying dependent, and $6,000 for more than one qualifying individual. The percentage used in calculating the credit is gradually reduced as adjusted gross income (AGI) exceeds $15,000. If your AGI exceeds $43,000, your credit is limited to the minimum allowed by this law–20 percent of qualifying work-related expenses.
WHAT IS THE DIFFERENCE BETWEEN THE CHILD TAX CREDIT AND THE CHILD AND DEPENDENT CARE TAX CREDIT?
These credits are quite different. First, the child tax credit. The purpose of this credit is simply to provide tax relief for parents, working or not, who have qualifying children under the age of 17. A qualifying child may be a dependent child, stepchild, adopted child, sibling, or stepsibling (or descendant of these individuals), or an eligible foster child. The child must be a U.S. citizen or resident and must live with you for over half the year.
If you’re eligible, you may be able to take a credit on your federal income tax return of up to $2,000 per child. The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level. A nonrefundable credit of up to $500 may also be available for qualifying dependents other than qualifying children.
The other credit — the child and dependent care tax credit — offers relief to working people who must pay someone to care for their children or other dependents. You may qualify for a tax credit equal to 20 to 35 percent of expenses incurred when someone cares for your dependent child (under age 13), your disabled spouse, or your disabled dependent so that you (and your spouse, if married) may work or look for work. The work-related expenses you can use when figuring the credit are limited to $3,000 for one qualifying individual, and $6,000 for more than one qualifying individual.
For married persons to qualify for the credit, both spouses must work outside the home, or one must work outside the home while the other is a full-time student, is disabled, or is looking for work (provided that the spouse looking for work has earnings during the year). Married couples must also file a joint income tax return. The credit is also available if you’re a single parent or a divorced custodial parent.
WHAT IS THE KIDDIE TAX?
Special rules commonly referred to as the “kiddie tax” rules apply when a child has unearned income (for example, investment income). Children subject to the kiddie tax are generally taxed using trust and estate income tax brackets on any unearned income over a certain amount. For 2019, this amount is $2,200 (the first $1,100 is tax free and the next $1,100 is taxed at the child’s rate). The kiddie tax rules apply to (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support.
Note that the kiddie tax rules apply regardless of whether the child is your dependent. Further, the definition of a child includes your legally adopted child and your stepchild.
You should note that a child who has significant tax exempt interest, or tax preferences or adjustments, may be subject to the alternative minimum tax
WHERE CAN I GET ADVICE?
Starting a new family will often change your taxable liability. It will also provide the opportunity to start discussions regarding life insurance, investing for retirement and college funding. Take time to talk with a trusted tax accountant and financial advisor to determine how you may need to adjust your financial goals.
At Kuderer Financial we specialize in helping young families make financial decisions with confidence. Setup a free one-on-one meeting to day to get answers to your individual questions.
Prepared by Broadridge Investor Communication Solutions, Inc.