Learn how to manage your costs and maximize your tax deductions
The cost of childcare in the United States has climbed dramatically over the past three decades. Unfortunately, wages arent keeping pace with the skyrocketing increases and working parents are struggling to keep up.
According to a report released by ChildCare Aware of America, the average annual cost of full-time childcare for an infant in a daycare center ranged from approximately $4,600 in Mississippi to nearly $15,000 in Massachusetts. In 36 states, those costs exceed a years worth of tuition and fees at a public four-year college. In all 50 states, childcare costs exceed average rent costs, according to the report.
The annual cost of childcare represents a significant expense and paying for it is a challenge for many families. Its important to analyze how much youre paying for childcare. There are Internal Revenue Service (IRS) credits you might be able to take advantage of, and you also want to ensure youre using your childcare budget in the best way for your family.
Explore your options
Dont assume that the local daycare center is the only option for childcare. A variety of alternatives exist that provide great care and also a possible savings. What works best for you?
Depending on where you live, a nannys hourly rate to look after two or more kids may actually be more affordable than enrolling each child in a daycare, preschool or an after-school program. Sharing a nanny might be another option if you have a friend who is in a similar situation.
An au pair
An au pair is a nanny who lives with you in exchange for room, board and a small fee. If you have space in your home, this can dramatically reduce your childcare costs, especially if you have multiple children.
Flexible work arrangements
Talk to your employer. Adjusting your work schedule – or your spouses, or both – might help reduce your need for childcare.
Working from home even one day a week can also help cut costs. Approach your employer with a proposal that benefits both of you.
Deciding to stay home
At some point, you need to crunch the numbers to see if it makes sense for either you or your spouse to stay home instead of paying for childcare. Its not a straightforward decision that can be made simply by looking at how much youll save on childcare. Other expenses to consider are clothing, gasoline, parking, car maintenance and even taxes if your familys second income pushed you into a higher tax bracket. The flip side is you might have less money to set aside for retirement, savings or luxuries like vacations. Youll need to decide what tradeoffs youre willing to accept.
Take a break
If you do use a childcare arrangement, the federal government offers ways to reduce your taxable income:
The Child and Dependent Care Credit
When its time to file your taxes, check to see if you qualify for the Child and Dependent Care Credit. If you paid someone to care for your child last year, you may be able to claim this credit on your federal income tax return. You can claim up to $3,000 of your total costs if you have one qualifying individual. If you have two or more qualifying individuals, you can claim up to $6,000 of your costs.
There is a list of requirements to qualify for the credit; check with the IRS or a CPA to see if you meet the criteria.
Flexible spending accounts
A recent study shows that 96 percent of U.S. employers offer a Dependent Care Flexible Spending Account (FSA) which allows you to set aside a portion of your paycheck tax-free to pay for dependent care expenses. Contributions are deducted from your paycheck prior to federal, state and Social Security tax. Qualifying expenses include daycare, babysitters and day camps. A maximum of $5,000 can be allocated for this purpose per year. It should be noted, though, that you cant take advantage of both the Child and Dependent Care Credit and the tax-free FSA deal for the same child-care expenses, and any tax-free FSA reimbursements reduce your $3,000 or $6,000 expense cap for claiming the credit.
Dollars & Sense is distributed by the Oregon Society of CPAs