Financial Considerations for Child Care
Consider your expenses.
Child care is one of the four top expenses for working parents, after housing, food, and taxes. Infant care is the most expensive. The cost of care usually decreases as your child gets older. However, the type of care you select and the number of children you have in care will impact your overall child care expenses.
Get details about all expenses related to your child care situation. In addition to the tuition, are there fees for registration, materials, field trips, meals, or transportation? Will you be charged if you pick your child up late? When do you have to pay for care—weekly, monthly? Do you get a discount if you pay early? Is there a sibling discount? Is there a scholarship program? Is there a sliding scale based on ability to pay?
Dependent Care Spending Accounts
Check to see if your company offers a dependent care flexible spending account or dependent care FSA as part of your benefits and if you are eligible for it. These accounts allow you to redirect pretax earning from your paycheck to a special account for child care expenses. Money you set aside in a flexible spending account is not only subtracted from your paycheck before income taxes are calculated, but it also avoids the Social Security and Medicare tax. You may elect to set aside up to $5,000 each year.
If your company offers dependent care FSAs, you will enroll annually during your company's open enrollment period for benefits. You will need the name, address, and Social Security number of your provider, or the tax ID number of your child care center. Carefully calculate your anticipated child care expenses because dependent care FSAs come with a "use it or lose it" policy. If you haven't used all the money in your account by the end of the plan year (usually December 31), you lose it. Call your company's benefits department for information on this program.
Child Care Tax Credit
The federal government may give you a credit on your personal income tax for a percentage of the money you spend on child care. The credit can be up to 35% of your qualifying expenses, depending upon your adjusted gross income. In 2010, parents were allowed to use up to $3,000 of expenses paid in a year for one qualifying child or $6,000 for two or more qualifying children to figure the credit.1 Check with the IRS (http://www.irs.gov) or your tax professional for information about how this credit may apply to your family.
Reference
1. Internal Revenue Service (IRS). (Updated 2015, March 19). Ten things to know about the child and dependent care credit (IRS Tax Tip 2011-46). Retrieved January 20, 2016, from http://www.irs.gov
Workplace Options. (Reviewed 2017). Financial considerations for child care. Raleigh, NC: Author.