How to Save on Child Care

by Sophia Bera on August 24, 2016

Many Millennials are at an age where they’re deciding when, or if, to grow their families. In addition to imagining all the ways having kids can change your life, it’s important to prepare financially.

One big expense many soon-to-be parents worry about is child care. The average annual cost in the U.S. is $18,000 — more expensive than in-state public college tuition in many states!

Child care costs are the cause of big career decisions in many families — should both parents work full-time? Should one or both work part-time? Or would having one stay-at-home parent make the most financial sense? Many parents relocate to a different city to be closer to family, or to have access to lower-cost child care.

The time to plan for these things is long before you’ve got a baby in your arms (and not just because you need to get on daycare waiting lists the second you get pregnant). With daycare costs rivaling monthly rent or mortgage payments, it’s essential to budget for child care.

There are also ways parents can save on the cost by taking advantage of tax credits or ways to lower your taxable income. Here are two ways I recommend parents save money on child care expenses:

Dependent Care Flexible Spending Accounts

Your employer might offer Flexible Spending Accounts (FSAs) as one of your benefits. Not only do FSAs allow you to set aside pre-tax income for qualifying medical expenses, but dependent care FSAs help you save on child care.

Married couples filing jointly, unmarried couples, and single individuals can make pre-tax contributions of $5,000 per year (married couples filing separately can contribute $2,500) to pay for a nanny, daycare, summer day camps, and before- or after-school care.

Keep in mind that FSAs are “use it or lose it.” Budget your contributions accordingly so you don’t lose money at the end of the year by not spending it.

Child Care Tax Credits

Working parents can claim up to $3,000 for the care of one child and up to $6,000 for two or more children. The income limit for this credit is $110,000 for married people filing jointly and $75,000 for single filers, and the credit is reduced as you approach those limits.

An important thing to note is that if you also contribute to an FSA, that will reduce the amount you can receive as a tax credit. Let’s say you and your spouse have two children and earn a combined income of $100,000. You contribute $5,000 per year to an FSA. The $6,000 tax credit you could receive is reduced by that $5,000, so you’d only be eligible for a $1,000 credit. This calculator is a great tool to use as you begin considering your options.

The Most Important Thing Is to Plan

Any major life change is a good time to reevaluate your financial situation. If you’re seriously thinking about having a child in the near future, it’s a good time to consider working with a financial planner. With their guidance, you can weigh your child care options and learn how dependent care FSAs and child care tax credits can help you save on expenses.

They can also help you set up a savings plan for your child’s education, ensure that you have adequate insurance coverage to protect your family, and work with you to create a new budget that reflects the changes in your life.

I help many clients navigate their options when it comes to saving for child care, college, and more. If you’d like to work with me, fill out this form and someone from the Gen Y Planning team will be in touch!