tax tips — September 14, 2017

Affordable Child Care Savings

by Susannah McQuitty

A little girl giggling on the floor

Spending money on babysitting, nanny and daycare services adds up really quickly over time, especially if your child needs care five days a week. So how do you make sure your kid is in good hands while keeping the expense affordable? Here are three ways to save on child care.

Barter services instead of paying the full amount

This is a pretty basic way to avoid spending money, but, let me tell you, it can really save a lot if you have time and a willing skill set.

Work in marketing? You could offer to help your babysitter or daycare establish a social media presence. Freelance writer? Rustle up some copy for fliers and newsletters. Plumber? I mean, it’s a daycare—they’re gonna need that.

Even cleaning after hours so the daycare service doesn’t have to hire a maintenance team can really add up.

Use a Flexible Spending Account (FSA) for child care

You may have heard of this one before, and if you have, chances are you were a bit baffled by the offer (as I was), since an employer-provided FSA is a “use-it-or-lose-it” account. If your company does provide the option, you can put up to $5,000 per year into a Dependent Care FSA for paying qualified child care expenses, but at the end of the year, you simply lose any money that wasn’t spent. Poof. Gone.

What? Who would ever want to use that?

Simple: Whatever money you put into an FSA won’t be taxed. It’s money that never has to see the inside of Uncle Sam’s pockets as long as it’s spent on qualifying health care expenses. Since you’re never taxed on the money, there’s a little more to go around for your kid.

It’s important to keep good records and budget for exactly how much child care services are going to cost for little Jimmy. If you set aside the full $5,000 and only end up spending $2,500, it won't be a good feeling to lose the other $2,500.

Two little boys laughing and playing outside

Using the Child and Dependent Care Credit on your tax return

If an FSA just isn’t your thing, you should look into the Child and Dependent Care Credit when it comes time to file your taxes again. You can’t stack an FSA with the Child and Dependent Care Credit, since an FSA is technically a tax break, but it’s another option. Who doesn’t like those?
Child care expenses for children who were 12 or younger during the year may qualify you for the Child and Dependent Care Credit, but you can’t claim the credit if the childcare provider (aka the babysitter) was someone in your own household.

The credit, which is claimed on IRS Form 2441, is worth up to 35% of the expenses not covered by your employer’s contributions (if your employer contributes at all). The maximum is $3,000 for one dependent, and $6,000 for two or more dependents. How much of that $3,000-$6,000 you actually receive depends on the number of dependents and your AGI, which will be calculated when you file.

You want what’s best for your kid, and part of that means being smart about your money and where it goes. Check out more savings for families in our Tax Guide, and make sure to check back with us when you’re ready to file your return come January!

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