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Navigating the financial world is difficult, especially when you add a new component to it like children, or the dreaded CHILD CARE! As discussed in some of our past posts by Jamie the ‘Money Momma’ child care can sometimes cost almost as much as you are making. This is sometimes even a deciding factor in how many children a couple may have, or whether or not a parent leaves the workforce. Fortunately, there are some systems in place to help young families with these costs, which Jamie discusses below.
Child care is one of the largest expenses that young households face when the primary caregivers are employed outside of the home. Despite the many different options we have now a days to choose from, cost of childcare continues to rank pretty high in terms of financial burdens of our parenting demographic. It is with that cost in mind that the Money Momma explains how to reduce your childcare expenses using an employer sponsored FSA (Flex Spending Account) plans or the US federal tax credit.
The cost of childcare is crippling for many, leaving us wondering where to find the money.
The first thing any dual income family should do after choosing the right childcare for their family is contact the company HR department and ask if “flexible spending for dependent care (FSA)” is offered as a benefit. Under federal law, this benefit allows a family to put away funds PRE-TAX from each paycheck into a special account, up to a certain amount per year, (currently $5,000 for married households and $2,500 for single filers but always subject to change). The funds in this account are then used to cover the cost of dependent childcare, as long as that childcare meets the necessary requirements. We discuss salary in pre-tax dollars but childcare is paid in after-tax dollars. The appeal of this strategy that is those dollars sitting in the special account will be paid directly to the childcare facility without the government taking taxes out first. This means that each dollar is actually worth the whole dollar. Contributing money to an FSA plan will also help reduce a family’s federal income tax bill.
If a company does not offer flexible spending for dependent care, parents may be able to claim the cost of childcare on their tax return under the “dependent care tax credit”. This Credit is available to people who, in order to work or to look for work, have to pay for child care services for dependents under age 13. A tax credit is kind of a cool concept and it acts just like a store credit (like those I always seem to have at Target). This is different than a tax deduction. If a filer has a $1,000 tax credit, he can use that to pay his taxes instead of his own money. The amount of any family’s tax credit for dependent care is based on many factors such as income, cost of childcare, and structure of the payments.
In few cases, a family will get to benefit from both an FSA plan and a tax credit (generally speaking, they cancel each other out). The rule is that the amount of childcare expenses claimed must be reduced by the amount that a family put into the FSA plan. If a family has to choose either the FSA or the credit, the FSA is usually the winner in terms of tax savings. There are some ways to benefit from both options if a family has more than one child. A finance professional such as Jamie, the ‘Money Momma’ can help any family determine how to make the most of their childcare savings.