Just over 60 percent of US families with children have two parents who are employed outside the home. Across the large number and wide spectrum of people represented in that statistic, most of them can probably agree on one thing: paying for childcare is expensive!
1. Common Childcare Options
Relatives—For the lucky few who have loving grandparents or another willing relative close by, cost may not be an issue at all. If you’re fortunate enough to fall into this category, you should definitely consider offering some non-wage appreciation to your child’s caregiver.
Home daycare---Daycares that are operated out of someone’s home are usually less expensive than facility-based daycares; they also offer a more home-like environment.
Daycare center—Depending on where you live, you might have to reserve a space far in advance and pay premium prices to put your child in a quality daycare center.
Nanny—The high cost of hiring a nanny is reflected in the personalized care and service you’ll get, plus the convenience of having your child cared for at home. Be aware, though, that if you pay a nanny more than $2,100 annually (for 2018), you’ll be required to withhold social security and Medicare taxes from what you pay her, and you’ll have to pay your share as an employer as well.
2. How expensive is childcare?
Across the country, the average annual cost of childcare varies widely: $4,000 to $22,600 depending on where you live. In certain states, you might pay more for childcare than you pay for rent! That breaks down to an average of $195-$580 per week for childcare for an infant, (depending on the type of care) according to a nationwide survey published by care.com. For most families, those numbers constitute over 10 percent of their combined earnings. But for a third of them, it’s over 20 percent!
Since it makes up such a significant portion of family budgets across the country, finding ways to save money on childcare can have a major impact on your financial goals. Advocacy groups agree that sweeping reform is needed to make childcare affordable for everyone who needs it, but big changes don’t happen overnight. Some small changes, though, in the form of the Tax Cuts and Jobs Act of 2017 (TCJA), already offer some relief through a couple of tax breaks of which every parent should be aware.
3. How can changes to the Child Tax Credit help?
When you file your 2018 taxes, make sure you take advantage of the Child Tax Credit. In years past, this tax break has credited parents $1,000 for each qualifying child. This year, with the TCJA, that number doubles to $2,000. Parents who owe taxes will be able to apply that amount to what they owe, while parents who will be getting a refund can receive up to $1,400 per child (if they earned at least $2,500; the previous threshold was $3,000).
4. Childcare Flexible Spending Account (FSA)
An FSA is a tax-deductible, employer-sponsored account available to many employees of private companies. Funds are withheld on a pre-tax basis from the employee's paycheck to fund the accounts. Withdrawals can be made to pay for qualified expenses, such as childcare, on a tax-free basis.
An FSA can be a good option for your family if you have a pretty good idea how much you will spend on childcare and are pretty certain that your circumstances will stay the same for the coming year. The balance does not roll over at the end of the year, so if you were to end up spending less than you budgeted for childcare, you’d lose the remaining money in the account.
5. Child and Dependent Care Tax Credit
Swope goes on to point out that the Child and Dependent Care Tax Credit, “can save up to $600 for families with one child and $1,200 for families with two or more children.”
The Child and Dependent Care Tax Credit allows dual-income families (and single parents) to claim credit for expenses related to providing care for their dependent children. This can be as much as 35 percent of $3,000 of qualifying expenses for one child, or $6,000 for two or more children.
You can only take advantage of both the Child and Dependent Care Tax Credit and an FSA if your childcare expenses exceed $5,000. That’s the maximum amount you can contribute to your FSA; once you’ve spent all of it, you can claim the credit (based on a percentage of your expenses) for the remainder of what you spent on childcare. With the low end of the national average cost of childcare sitting at $4,000 annually, many families will fall into this category. This credit only applies to taxes you owe; you won’t receive any of it if you get a refund.
6. Other ways to reduce childcare costs
If the high cost of childcare is still an obstacle to your financial goals as a family, there are other possible ways to reduce your costs.
Working from home--Eight million Americans opted to work from home in 2017, a number that’s sure to increase in coming years. Certain professions lend themselves to working from home better than others; if yours is a good fit, it might be worth approaching your boss with this option that has proven to be positive for both employees and employers. If you still need help so you can actually work, you can pay an older child or teen to play with your kids for a few hours.
Trading childcare--You might be able to work out a way to trade childcare with friends, neighbors or relatives who are also looking to save money.
Creative scheduling--You and your spouse might be able to rearrange your work schedules to reduce the number of hours per day or days per week that you need to pay for childcare.
Nanny share--If you really want a nanny but can’t afford such an expensive choice, you could consider arranging a nanny share with friends or neighbors who would also like to hire a nanny. This option is a win-win-win because both families get specialized nanny care at a reduced cost, while a nanny willing to work for two families is able to increase her earning power.
Tax breaks and creative problem solving can help reduce the percentage of your family budget that you spend on childcare. Don’t forget to set aside some of the money you save for college!