I had a wonderful phone call last week with two very awesome clients of mine. We were getting ready to discuss some business strategies when they decided to share some “news” with me. I curiously asked what the news was since I good tell that it was good. “We’re pregnant with twins!” was the reply.
This was not something that had come easily for this couple, so beyond just the normal excitement around the announcement, there was an extra bit of happiness that rang through to me. I wished that I could have been present in person, as I would have liked to give them both a big hug! After we talked a bit about the baby, they asked a familiar question—“Is there any tax planning that we should be thinking about for the babies?”
I chuckled and asked if I could defer the answer for a week and write an article about the topic. They were kind enough to allow me to defer, and so to keep my commitment, below is a “bundle” of tax strategies for new parents!
Medical Expenses Associated with Pregnancy, Delivery, and Postpartum Care
Without a doubt, you will probably have some medical expenses throughout the pregnancy, at the time of delivery, and afterward. The great news is that most of these expenses are probably tax deductible. The key questions are what expenses are deductible and how should you deduct them.
What Does and Does Not Qualify as a Medical Deduction Related to Pregnancy and Birth?
A very important rule in determining whether or not a medical expense is deductible is that you need to pay for it. If the deductions are reimbursed through an employee health reimbursement plan (HRA) at work or through health insurance, or paid with money from a health savings account (HSA), they are typically not deductible. But if you come out of pocket for the expense, KEEP THAT RECEIPT and GOOD RECORDS!!
Deductible medical costs are typically paid out of pocket with post-tax money. Items that qualify for a deduction generally include costs for doctor’s and dental visits, costs for lab work and tests, ultrasounds, and even the mileage to travel to and from your appointments. Check out IRS Publication 502 for a good list on items that may be deductible on your tax returns.
During pregnancy and after birth, you will likely incur many other “necessary” expenses that unfortunately are excluded as medical deductions. These include maternity clothes, diapers, formula, most over-the-counter medicine, and subscriptions to video streaming services during late nights in which your little one mixes up his or her days and nights (let the fun begin!).
The next important item is how to deduct these medical costs. Generally speaking, you only really benefit from deducting medical costs if (1) you are itemizing and (2) only to the extent that your costs exceed 10% of your adjusted gross income (AGI) for the tax year. If your AGI is $100,000, you must (1) itemize and (2) only deduct dollars in excess of $10,000 (10% of AGI). In other words, you would receive a $1 deduction for spending $10,001 since you only exceeded the 10% “floor” by the $1. This isn’t really a great situation, but it’s where most Americans find themselves.
At Kohler & Eyre CPA’s, we want to maximize your medical deductions so you can take advantage of all of the costs you incur. This may be possible depending on your tax situation. We encourage you to explore some of these ways of maximizing your medical deductions. You can start by visiting Mark’s blog here and reading up on some ways that you can save THOUSANDS of dollars by simply changing how you pay for your medical care. They include utilizing HSAs, HRAs, starting a small business, etc.
Health Insurance Premiums
Lets not forget health insurance and odds are that you probably have some form of health insurance. Health insurance premiums that can be deductible in your business or at least as an itemized deduction on Schedule A or on the front page of your tax return (if you have a small-business) unless they are paid with pre-tax money. Check out partner Mark Kohler’s video on Deducting Health Insurance:
Keep in mind that you may want to consider alternatives to health insurance depending on your situation. A popular option that continues to grow in light of rising health care premiums is that of healthcare sharing ministries and healthcare co-ops. Please do your research before looking at any of these options. Many of these monthly costs (like those for healthcare ministries) may not be deductible as it is not true health insurance.
Consider Adjusting Your Withholdings
Since you will be claiming an extra dependent, reducing your overall tax bill, you may be able to reduce income tax withholdings from your paychecks. Talk to your human resources representatives and consider filing a new W-4 form with your employer to claim an additional withholding “allowance.” This can help put more money in your pocket throughout the year. Ask your trusted tax advisor for help in determining your withholdings amounts if necessary.
Personal Exemption and Filing Status
Once your little one arrives, you may be entitled to claim a personal exemption for him or her. This is basically an extra reduction to your federal taxable income of $4,050 for 2017. Most states also allow for an exemption for your state taxable income. One word of caution—high AGI levels or being subject to alternative minimum taxes (AMT) can reduce or eliminate the exemption.
If you are single parent and have traditionally filed as “Single”, your child will further improve our tax situation by allowing you to claim “Head of Household”. You may also qualify for the earned income tax credit. These adjustments further reduce your overall tax bill and can allow for you to claim additional tax credits (many of which are described below).
Child Tax Credits
In addition to the extra exemption, you may also be claim a tax credit for your new child. The credit is worth up to $1,000 and may be a refundable tax credit. Remember that tax credits provide a dollar for dollar reduction in your overall tax bill. The best part is that you can continue to claim it year after year until your child reaches the age of 17. If your income is greater than $110,000 on a married filing jointly return or $75,000 for single or head of household, you may see this credit begin to phase out.
Dependent Care Tax Credit and Flex Plans
If you pay for child care with the goal of allowing you to go to work and if you generate income that is taxable during the year, you may be eligible for the dependent care tax credit. This credit can vary depending on how much you pay for your child’s care as well as how much income you earn during the year. The cool part about this credit is that even those that earn higher amounts of income can still get some benefit from it. Overall it can vary between $600 – $1,050 for one child and $1,200 – $2,100 for two or more children depending on income and the price of the child care.
If your place of employment provides for it, you should definitely ask about flexible spending (or child care reimbursement) accounts to help subsidize your child’s daily care costs. They can allow for up to $5,000 to be allocated into a flex spending account that can then be used to pay for child care so you and/or your spouse can go to work. The one caution here is that these accounts may be “use it or lose it” accounts where in you would need to spend the money before the end of the period. The benefit is that this money is pre-tax, so you would not need to pay any income taxes on it.
This is a HUGE area where a lot of clients get things mixed up, as it is very unfamiliar to a lot of people. Mark has written an entire article on this topic, which I would encourage you to read. The moral of the story is that if you hire a nanny or caregiver and you control not only what work needs to be done but how the work is done, you may be considered an employer for federal and/or state tax purposes. This may mean that you have payroll and unemployment responsibilities on behalf of your employee if you pay them more than $2,000 in 2017. Please consult with a trusted tax professional in this area if you have questions here.
Start Saving for College
It is no secret that life is expensive. Life with kids is even more! Perhaps one of the largest expenses that parents worry about is paying for college one day. As tuition costs skyrocket and student debt is a top priority in discussions about fiscal well-being, new parents can take important steps to help a child be prepared for these future costs. Mark has previously written a good article about this topic, so please visit it for additional considerations; however, I would like to just list a couple of popular options here:
- Coverdell Education Savings Account (ESA): These plans can grow tax-free and come out tax-free if utilized for qualified education expenses (such as tuition, books, fees, supplies, a computer, and even room and board subject to certain limitations). They can also be self-directed. Contributions are limited to $2,000 per year per child under age 18. Income thresholds apply as well and can phase out.
- Qualified 529 Plans: This is a great option because families can contribute significant amounts and there are no limits based on the parent’s income tax brackets. These plans generally permit an “account holder” to open an account for a future student, or beneficiary, for the purpose of paying the beneficiary’s eligible college expenses. The account holder generally chooses among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Contributions are generally not tax deductible for federal purposes, but many states offer a tax incentive to participate in these plans.
BONUS: Adoption Tax Credits
Many clients are unaware that there exists a federal tax credit (and oftentimes something at the state level) to assist with what can be the high costs of adopting a child or a baby. This is an awesome help to many families that desire to give a child a home. I personally have a great respect for the many families that are willing to do this!
The adoption tax credit is available to families who adopt through foster care systems, private U.S. adoption, and intercountry adoption. For 2017, qualifying families can claim a credit of up to $13,750 in qualified adoption expenses. Families who adopt a child that a state has determined has special needs may even be able to claim the maximum credit regardless of their actual expenses. Higher income families who make more than $201,920 in a tax year may only claim a partial credit. This credit completely phases out for families making more than $241,920. If a family’s tax liability is less than the credit, the credit can be carried forward for up to five years to reduce a future tax liability.
For those of you that are expecting a new addition to your family, whether through giving birth to a child or through adoptions, you are probably both excited as well as a little anxious. Enjoy the journey! It is such an awesome time in your life! Look to your family and friends for support, and you will do just great. If you need any assistance with tax, legal, or financial planning assistance, please give us a call at K&E or KKOS Lawyers, and we’ll be glad to help. Best of luck in your new adventures!
Cassidy Carter is a Tax Manager and Certified Public Accountant (CPA) at the home office of Kohler & Eyre CPAs, LLP. Cassidy’s practice areas include small business and individual tax planning with an emphasis on entrepreneurship and real estate. Cassidy previously worked in the tax department at Deloitte in Las Vegas, Nevada, and is currently married with 4 children living in Cedar City, Utah.