While the majority of women today enter the workforce at some point in their lives, the birth of a child often causes a woman to rethink her career, at least on a temporary basis. Among other concerns, a new mother often must weigh relevant financial concerns, including not only overall household income, but also the costs of daycare, taxes, and other job-related expenses. In some cases, a family may determine that it is simply not cost-effective for a new mother to return to work, when comparing the costs of the mother working vs. the financial impact to the household income of the mother staying at home with the new child.
The first step toward evaluating whether one parent should forego work and remain at home for childcare purposes involves drafting a household budget for both of your potential situations, including one with both parents working and producing income, and one with only one parent working and contributing to the family income. The budget process will help clarify your financial situation. One thing that you may discover is that returning to work may not do much to increase your household income, especially after paying for costs such as childcare, transportation and taxes.
The Marriage Tax Penalty
Our national income tax system places a penalty on married couples with two significant incomes. The combined income of the couple will inevitably push the couple into a higher tax bracket, which causes the couple to owe more in income taxes. This so-called “marriage penalty” actually works as a disincentive for both spouses to work. In some cases, the tax savings may be substantial if one spouse stays home and provides child care, as the family may fall within a much lower tax bracket, thus causing the family to owe less in income taxes.
The Child Tax Credit
Furthermore, by having only one spouse work, your lower tax bracket may entitle you to claim the child tax credit, and even the additional child tax credit in some circumstances. If you are eligible for the child tax credit, you may be able to reduce your income taxes by as much as $1,000 for each qualified minor child. Your child qualifies for the child tax credit if he or she meets the following criteria:
- The child was age 16 or younger at the end of the tax year.
- The child was your biological child, stepchild, foster child, adopted child, sibling, stepsibling, or any of their offspring including your grandchild, niece or nephew.
- The child cannot have provided more than half of his or her own financial support.
- You have claimed the child as your dependent on your federal tax return.
- The child is a citizen, national, or resident alien of the U.S.
- The child has lived with you for more than half of the calendar year for which you must pay taxes.
Your ability to claim the full child tax credit is directly tied to your household’s adjusted gross income, your filing status, and the amount that you owe in income taxes or any alternative minimum tax. As your adjusted gross income rises, the child tax credit phases out.
Moreover, you may be able to claim an additional child tax credit in some circumstances, such as where the income taxes that you owe are too low for you to claim the entire amount of the child tax credit. Therefore, substantially lowering your family’s adjusted gross income by having only one spouse work can entitle you to tax credits that otherwise would be unavailable to you due to your income.
Dependent and Child Care Tax Credit
If both you and your spouse work, and you must pay a qualified caregiver or daycare facility in order for you both to work, then you should be able to claim the dependent and child care tax credit. Based on your income, you are entitled to a tax credit for a certain percentage of the eligible child care expenses that you paid. This percentage ranges from 20% of the expenses that you paid to 35% of the expenses. In any case, this tax credit is capped at $3,000 for one eligible child and $6,000 for two eligible children.
If you wish to claim the dependent and child care tax credit, you must meet the following conditions:
- The expenses were for the care of a child under the age of 13 or a spouse or dependent who was unable to care for himself or herself due to a mental or physical condition.
- You and your spouse had earned income for the tax year.
- The child care provider that you paid for your child’s care is not one of your dependents.
- You paid for child care so that you and/or your spouse could work or look for work.
Assuming that you meet all of the above requirements, you can claim a tax credit for a certain percentage of the child care expenses that you paid. If, however, your employer deducted amounts from your wages pre-tax for the purposes of qualified child care expenses, those amounts reduce the amount of the child care tax credit that you can claim.
There are a variety of factors to consider when deciding to go back to work after the birth of a child. Tax issues – such as the marriage tax penalty, the child tax credit, and the dependent and child care tax credit – should all factor into the decision-making process. Whatever your situation may be, carefully considering these issues is essential to making the right decision for your family.
Linda Lawrence is a writer for BackTaxesHelp.com, a site that provides easy-to-understand guides on resolving tax problems, such as how to remove a bank account levy and how to set up IRS installment plans. Additionally, the BackTaxesHelp Tax Blog offers news and advice on a variety of tax-related topics.Follow Moms To Work on Twitter @MomsToWork.