If you can’t make head or tail of how your tax status will change or which benefits you’ll be entitled to in your journey to parenthood and beyond, then this article is your go-to-place.
From tax benefits and effects on withholding allowance, to help with adoption, fertility treatments, and childcare, Josh Zimmelman from Westwood Tax and Consulting shares all you need to know about tax whichever way you approach parenthood.
Daniela: Good afternoon Josh Zimmelman, it’s a pleasure to welcome you on Dreaming of Baby today for our discussion on the financial aspects related to parenthood. Today we will be discussing tax related issues; before we proceed with our discussion, it would be great if you could introduce yourself to our readers.
Josh Zimmelman: I’m Josh Zimmelman, owner of Westwood Tax & Consulting. We’re a New York-based accounting firm with offices in Manhattan and Long Island. I’ve been in practice for about 15 years and assist individuals and small businesses with their tax needs.
Changes in withholding allowance with a new baby
Daniela: Great, thank you, Josh, we’re looking forward to our discussion today as we believe it’s an important one to have on the journey to parenthood. As a first question, once someone becomes a parent, does this change anything with regards to withholding allowance?
Josh Zimmelman: If you recently had a child, that means you have a new dependent. This changes your withholding allowance, so make sure you notify your employer if you have any additional dependents during the year so you can submit a new W-4.
Daniela: At which point would this new withholding allowance come in force?
Josh Zimmelman: Once the baby is born, I would recommend updating your W-4 with your employer. A child born in October of the calendar year is still considered a dependent for the entire year.
Tax Benefits – Dependents
Daniela: Are there any tax benefits once you have a child dependent on you?
Josh Zimmelman: You can claim your child as a dependent if they are under age 19 and live with you for at least half the year (or if they’re under 24 and a full-time student). If you had a new baby during the year, that’s an additional dependent for the entire year, no matter when he or she was born (even if it was on December 31st). If you’re divorced or unmarried, remember that only one parent can claim a child as a dependent (usually the custodial parent or whichever parent the child lives with more often).
Daniela: If a single parent has the child for half the year, with the other parent having the child for the rest of the time, how would the Dependent Child Deduction work?
Josh Zimmelman: If the filing status of the parent is married filing separately, this credit is no longer available. If the parent files using the single filing status only the custodial parent can claim the dependent child tax credit even if the other parent claimed the child as a dependent.
Daniela: So, in effect, only one parent can register the child as dependent even if the child is dependent on both but for different periods of time?
Josh Zimmelman: Correct. If a child lives with two parents different times of the year, only one parent can claim the child as a dependent. If both parents claim this child they will likely receive a tax notice or the tax return will be rejected from electronic filing.
Josh Zimmelman: “If a child lives with two parents different times of the year, only one parent can claim the child as a dependent.”
Daniela: Thanks for clarifying this very important point. In terms of childcare, is any assistance provided to help pay for this service?
Josh Zimmelman: The Child and Dependent Care Credit would come into play. Qualifying working parents of children under 13 can claim a credit of up to 35% of childcare expenses. This doesn’t just apply to day-care centers and babysitters. You can also count summer day camp if sending your kids there allows you to go to work. (You can still receive this credit for children or other dependents over age 13 if they’re unable to care for themselves.)
Daniela: Would there be any differences in credit for a family with multiple children and can a parent still benefit from this if on maternity-related leave/absence from work?
Josh Zimmelman: A family with more than one child would be limited in the expenses they can use to claim this credit. The maximum amount of expenses to be used in calculating the credit for one child is $3,000 while the maximum would be $6,000 for 2 or more. In order to benefit from this credit both spouses must be working, looking for work or be considered disabled.
Fertility Treatments and Tax
Daniela: Thanks, very good to know. If the path to parenthood proves challenging and the parent-to-be has to seek fertility treatment and, as many are aware, expenses in this regard can be substantial, can the parents-to-be rely on any financial support whilst on this journey?
Josh Zimmelman: There are a number of grants and scholarships that provide financial support to those struggling with infertility. If you don’t have the financial resources to pay for fertility treatments like IVF, you may qualify to apply for these programs.
Josh Zimmelman: “There are a number of grants and scholarships that provide financial support to those struggling with infertility.”
Daniela: Can a person benefit from any tax breaks with regards to such treatments?
Josh Zimmelman: Absolutely. IVF procedures would be deductible as medical expenses on Schedule A Itemized Deductions. Keep in mind though that medical expenses can only be deductible to the extent that they exceed 10% of your adjusted gross income.
Adoptions and Tax
Daniela: In terms of adoptions and expenses incurred in this regard, are there any incentives which parents can avail of?
Josh Zimmelman: If you spent a lot of money on an adoption this year, such as travel expenses or legal fees, you may be able to earn a tax credit from the government. If your employer has an adoption assistance program, that may help reimburse some of your adoption expenses as well. There are also adoption grants you can apply for that can help cover some of your costs.
Daniela: Can you provide further information on applying for such a tax credit in terms of adoptions, please?
Josh Zimmelman: The IRS does provide a tax credit to help defray the cost of adoptions. The limit for 2016 was $13,460. This credit does get phased out for higher-earning taxpayers. Based on 2016 figures, if your income was under $200,000 you would be able to claim the entire credit. Expenses used in calculating the credit would be considered reasonable and necessary adoption fees, court and attorney fees, and traveling expenses.
Daniela: You’ve also mentioned adoption grants; would these also be income-dependent?
Josh Zimmelman: That would depend upon the agency issuing the grants.
Medical Expenses and Tax
Daniela: This brings us to the next question: Parenthood brings with it new expenses, including medical ones, what should parents and parents-to-be know on managing such costs?
Josh Zimmelman: You might be able to deduct medical expenses, if you spent more than 10% of your adjusted gross income. It doesn’t just apply to a doctor’s visits. There are plenty of other parent-related costs that may qualify (like Lamaze classes or breast pumps). If you’re self-employed, you can deduct 100% of the cost of health insurance for yourself, your spouse, and your children (under age 27), as long as the deductions don’t exceed the amount your business earns.
Daniela: In the case of a specific long-term illness or disability, would the 10% still apply?
Josh Zimmelman: The 10% would apply even with long-term illness or disability. However, tax reform is currently being discussed in Washington and this 10% threshold may change. Prior to the Affordable Care Act, it was 7.5%.
Donations to charity and its effect on tax
Daniela: On another subject, if a parent donates clothes and other items that the child has outgrown, can this be classified as a charitable donation?
Josh Zimmelman: You can a get a deduction for charitable giving of non-cash items such as baby clothes, furniture, and household items as long as all items are in good condition.
College Savings and Tax
Daniela: In terms of college savings, can parents benefit from any tax deductions?
Josh Zimmelman: If you contributed to a tuition savings plan for your child, you may be able to qualify for a tax deduction in certain states. For example, under New York’s 529 plan, you can deduct up to $10,000 a year.
Daniela: So does tax deduction vary from state to state? What should a parent keep in mind when selecting a state?
Josh Zimmelman: Tax deductions do vary from state to state. When considering what state to choose, you should consider the contribution limits, the tax benefits, the investment options and the fees that are charged. While your home state may offer tax benefits, other state plans may offer a better overall package.
On a final note…
Daniela: Thank you for the insight you’ve shared with us Josh, on a final note, what would be that one main piece of advice that you would give expectant parents as they financially prepare for a new addition?
Josh Zimmelman: Life insurance! We’ve all seen on social media the funding campaigns when tragedy strikes a young family and they are not prepared. After shopping for cribs and strollers, go ahead and shop for life insurance policies. In my opinion, term life insurance gives expectant parents the coverage that they need at the most reasonable price.
Daniela: Thank you for your time today, Josh!