Despite a down economy, costs continue to rise for healthcare, education and childcare in the U.S. In regards to childcare, there are a number of ways to combat rising costs. Below are five ways to help you save.
IRS Publication 503 highlights some of the tax benefits available for families and parents that use outside childcare. There are the standard dependent tax deductions on basic tax forms, but there are also ways to exclude care benefits received from your employer. Some things that can be excluded are amounts paid to the employer for childcare, the fair market value of care provided in a daycare facility sponsored by your employer or any pre-tax contributions made with a dependent care flexible spending arrangement.
Flexible Spending Accounts
Dependent care flexible spending accounts (FSA) let parents set aside as much as $5,000 in pre-tax money to pay for childcare. In similar fashion to a standard FSA, they are deducted from weekly or semi-weekly paychecks prior to the deduction of federal, state and Social Security taxes. For an individual in a 28% tax bracket, this can mean savings of $1,400 annually or close to 30% of the original $5,000 amount that would have otherwise gone to paying Uncle Sam.
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Compare Help Options
There are two primary options for the daily care of your child. The first is to simply have one spouse stay at home. The second is to have a nanny come into the house to provide care. This is one of the more convenient options, but according to the IRS this may qualify your home as a household employer, which would require the payment of Social Security, unemployment and tax withholdings. This "nanny tax" may or may not be worth it. Some outside services, such as those that provide nannies, can provide some relief or guidance on how to most economically have someone come into your home and care for your children.
Stay at Home
Sometimes, the best option for the well-being of your child and checkbook may be for one spouse to not work and stay at home. The cost per child of hiring a nanny or outside daycare facility averages around $12,000 annually. If you have more than a couple of children and have a household income less than $40,000 per year, it is more economical to stay at home and raise the kids. However, if you volunteer to take care of other children, you may be eligible for additional tax deductions.
SEE: Staying Home Vs. Daycare: A Financial Conundrum
The Bottom Line
Tax credits and other saving methods can literally save you thousands of dollars in annual childcare expenses. It can be the difference between needing to stay at home or heading to the office to try and get ahead by earning some extra annual income.