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Once upon a time in this country, people had large families to help them work the farm. These days, if people choose to have large families, it is usually not for the economic benefit. Raising children in America in 2019 is expensive, and one of the first, and biggest, expenses, is child care. Let’s talk about what child care really costs, and how to get a break on these expenses.
Having both parents in the workforce is a necessity for many families, and even in those that can afford to have a parent stay home, both parents may have decided that it is important to continue their careers after baby comes along. Whatever the reason, child care is an essential expense for many American families.
What Child Care Really Costs in America
Some families are fortunate enough to have grandparents or other trusted relatives to rely on for child care. Those who don’t have to pay for it, and costs vary widely. Some children are cared for at home by a nanny; others go to a day-care center. As a general rule, care for infants is more expensive than care for older children. This makes sense, because infants require the most hands-on care.
According to Child Care Aware of America, in 2017, average annual child care costs for one child were as follows:
- For infants cared for in a center, $11,959; at home, $9,321.
- For toddlers cared for in a center, $10,096; at home, $8,729.
- For preschoolers cared for in a center, $9,170; at home $8,889.
If those figures look like they approach amount you might spend on rent or a house payment, you’re right. For families with two children needing child care, annual costs are higher than the median cost of housing for homeowners who have a mortgage in 35 states and the District of Columbia. Many families find themselves between a rock and a hard place: needing for both parents to work, but struggling to afford the child care expenses that go along with a two-income household. Fortunately, there are tax credits and breaks available to parents paying for child care, and these can take the sting out of this necessary expense.
Tax Breaks for Child Care
There are two primary tax-related avenues for catching a break on child care expenses. The first is the child and dependent care tax credit. Families with one child who qualifies for the credit (typically a child 12 years old or younger) are able to claim up to $3000 per year in child care expenses on their federal income tax return; families with two or more qualifying children can claim up to $6000. Depending on the family’s income, they can receive a credit for anywhere from 20% to 35% of their eligible child care expenses. The more household income, the lower the amount of the credit, until it reaches a floor of 20% for households whose adjusted gross income (AGI) is $43,000 or more. The credit is only available for child care expenses that make it possible for a parent to work.
There are two primary tax-related avenues for catching a break on child care expenses: the child and dependent care tax credit and dependent care flexible spending accounts.
To convert these percentages into real dollar amounts, a family with one child who qualifies for the child care tax credit could receive a credit ranging from $600 to $1,050; a family with two or more qualifying children could get a credit of $1,200 to $2,100.
Some important notes are in order. First, this is a tax credit, not a tax deduction. A tax credit lowers tax liability dollar for dollar. If a family had a tax liability of $1500 and was eligible for a child care tax credit of $1000, their ultimate tax liability would be $500. However, the child and dependent care credit is non-refundable. If the same family had a tax liability of $1,500 and was eligible for a child care tax credit of $2,000, their tax burden would be reduced to zero, but they would not get a refund of the additional credit amount.
Families with more income might benefit more from the use of a dependent care flexible spending account (FSA) if their employer offers one. With an FSA, you can set aside up to $5,000 in pre-tax dollars for child care expenses for qualifying children. Money put in an FSA bypasses not only federal income tax but Social Security and Medicare taxes. There is no “double-dipping” allowed; you cannot use money from an FSA to pay for child care expenses and then take a child care credit for those same expenses. However, once you have spent the $5,000 you set aside in the FSA, you can still take a tax credit for up to $1,000 in additional child care costs if you have more than one child.
If you have questions about tax breaks for child care, or about planning for your family’s needs, we invite you to contact our law office to schedule a consultation.
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