Manage Your Day Care Costs, Maximize Your Deductions

Jun 15, 2016

MoneyLife100 The cost of child care has climbed dramatically over the past three decades. Unfortunately, wages aren’t keeping pace with the increases, and working parents are struggling to keep up.

According to the National Association of Child Care Resource & Referral Agencies, the average annual cost of full-time child care in a daycare center can range from $3,582 to $18,773. Parents have reported costs of up to $2,000 a month for infant care in cities like Boston and San Francisco. 

The annual cost of child care represents a significant expense, and paying for it is a challenge for many families. It’s important to analyze how much you’re paying for child care, say experts at the Pennsylvania Institute of Certified Public Accountants (PICPA). 

Explore Your Options

Don’t assume that the local daycare center is the only option for child care. A variety of alternatives exist that provide great care and also possible savings. What works best for you?

A Nanny

Depending on where you live, a nanny’s hourly rate to look after two or more kids may actually be more affordable than enrolling each child in 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 

In 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 child care costs, especially if you have multiple children.  

Flexible Work Arrangements

Talk to your employer. Adjusting your work schedule, your spouse’s, or both might help reduce your need for child care. Or consider telecommuting. 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 child care. It’s not a straightforward decision that can be made simply by looking at how much you’ll save on child care. Other expenses to consider are clothing, gasoline, parking, car maintenance, and even taxes if your family’s 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. You’ll need to decide what tradeoffs you’re willing to accept.

Take the Breaks

If you do use a child care arrangement, the federal government offers ways to reduce your taxable income. One such tax break is the Child and Dependent Care Credit. When it’s time to file your taxes, check to see if you qualify for the 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 Certified Public Accountant (CPA) to see if you meet the criteria.

Flexible Spending Accounts 

Most U.S. employers offer a Dependent Care Flexible Spending Account (FSA) that allows employees to set aside a portion of their paychecks, tax-free, to pay for dependent care expenses. Contributions are deducted from paychecks 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.

Note: You can’t 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. 

A CPA Can Help

Need a trusted advisor? A CPA can help you evaluate your short- and long-term personal financial goals, including how to save and pay for everything from child care to college and beyond.

If you have questions about personal financial planning, speak with your financial professional. To find a CPA in Pennsylvania by location or area of expertise, ask your family or friends for recommendations or use the PICPA CPA Locator.

Original publication date: July 22, 2013

The Pennsylvania Institute of Certified Public Accountants (PICPA) is a premiere statewide association of more than 22,000 members working in public accounting, industry, government, and education. Founded in 1897, the PICPA is the second-oldest state CPA organization in the United States.

Money & Life Tips are a joint effort of the AICPA and the Pennsylvania Institute of Certified Public Accountants (PICPA), as part of the profession’s nationwide 360 Degrees of Financial Literacy program.