Inductions and Deductions

It’s almost the more-or-less official start of tax season — most if not all tax-related information must be given to wage-earners by Jan. 31, so that they can compute their taxes owed by April 15. Oh, yeah, I’m doing the happy dance. Not!

There are probably numerous inductions and C-sections performed in the last few days of December. Why? Tax deductions, of course! The way our tax system is set up, children are deductions (regardless of how little money they actually cost the parents) while fetuses are not (regardless of how expensive they are — prenatal visits, ultrasounds, quad-screen tests, etc.). So, babies who are born at 11:59 on Dec. 31 get their parents a tax deduction for the whole year of 2008, while those born at 12:01 on Jan. 1 only start their tax-deductible status the following year, 2009.

I’m sure many people say, “Why not?” Of course, there are numerous medical reasons why not to choose a medically unnecessary procedure, summed up in the following statement: if it’s not necessary, then it introduces unnecessary medical risks for no medical benefit whatsoever.

But I wonder how much money people actually save by forcing their babies to be born prematurely. (I use that term deliberately — they may not be “pre-term” but since they haven’t signaled full maturity by starting the labor process, who is to say that they are actually mature?)

I’m no CPA, but from what I can gather about current tax rules, most people will get a $500 tax credit for a child (this means that after everything is figured out, you take the total amount of taxes owed and subtract $500); and each dependent also garners the tax-payer a $3500 exemption for taxes (which means that if a man with a wife and two children earned $35,000 in 2008, he gets to subtract $3500 x 4 or $14,000 from his income, so instead of paying taxes on $35,000, he pays taxes on $21,000; so to make it simple, we’ll pretend that the federal government only wants to take 10% of the money you earned, so reducing your income by $3,500 reduces the amount of taxes you’d pay by $350). There may be other reductions in the amount of taxes paid; but then again, many people will earn too much to qualify for some of these deductions and credits, so their effective “savings” by having their babies unnecessarily early may be more or less.

So, what’s the big deal? Baby is born a few days before he’s totally ready — most likely everything will be okay, and we get a neat tax deduction — yippee!

Not so fast. As I said before, unnecessary medical procedures introduce medical risk for no benefit. Most likely everything will be okay, but a certain percentage of mothers and/or babies will be harmed or put at risk. Increased medical risks tend to cost more. Many people’s health insurance is set up so that they pay a percentage of the costs. So, every added “thing” (whether it’s the medication, extra hospital stay for mother or baby, infection, epidural made necessary by painful pitocin-contractions, C-section due to failed induction) will cost the mother probably 20% of the total cost of the entire bill. Now, if you don’t have any insurance, you’ll pay all of the added costs yourself. Now your “big” tax deduction may not seem quite so big. While many people have met their health insurance deductibles (if they have them) by the end of the year, some people have multiple deductibles for multiple types of health care, and may be surprised by how much they end up paying for their “insured” pregnancy and birth — for instance, there may be one deductible for obstetrician visits; another for medical tests including ultrasound; if other doctors are called in to consult (say for heart problems), you may have a separate deductible for that; and then another deductible for the hospital charges; and yet another for the use of the anesthesiologist. Even if you only pay a percentage, those costs add up.

Friends of mine had to pay 20% of a $25,000 total bill (all doctor’s and hospital charges) for their baby’s birth by necessary C-section, or $5,000. While I daresay that most births don’t cost the parents that much out-of-pocket, understanding that some births might end up being that much — especially if a C-section is performed, or if the baby ends up in the NICU with breathing problems — just might put a damper on some enthusiastic penny-pinchers who might be tempted to have an induction to create a tax deduction for the year.

One final note — here’s the kicker — if the baby is born at the end of the year and does create a tax deduction for that year, current tax law states that children who are 17 or above at the end of the year do not qualify their parents for a tax deduction for them for that year. So by gaining a tax deduction this year, you lose it some 17 years in the future. So it ends up being six of one and a half dozen of the other — unless, of course, you or your baby lose the statistical game and end up with a medical problem caused by an unnecessary induction or C-section. At which point money becomes more or less irrelevant.

2 Responses

  1. I had to dig around for this Aussie article I had read…

    Year-end rush for babies to get bonus
    November 17, 2008

    Pregnant women from high-income families may bring forward the birth of their baby to avoid the introduction of means testing for the baby bonus.

    From January 1 the $5000 baby bonus will not be available to households whose combined income exceeds $150,000.

    Melbourne Business School economist Joshua Gans said his research showed that the introduction of the baby bonus in 2004 and the $800 increase in the payment in 2006 led to almost 2000 births being moved for economic reasons…

    http://tinyurl.com/speedbaby

  2. FYI, read more at Hoyden About Town for the controversy surrounding Gans’ work. What his early research showed was that women DELAYED inductions and c/s to get the extra baby bonus when the amount was raised.

    I have not read the new study. Taxes in Australia are 30% of gross income, real estate is incredibly expensive, and so are groceries. However, if Aussie women did schedule unnecessary procedures for extra cash, well, geez I hope things turned out OK.

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