Daycare is expensive. Yep. That’s the cold hard truth. With two babies, the budget is going to get pretty tight around here.
The average cost of daycare here in Kansas City for an infant is right around $200. Choosing a daycare is a pretty important decision, which deserves its own post.
Anyway, since its tax season – I figured I’d give everyone the low down on how to deduct daycare from taxes.
Dependent Care Account: This is basically a “daycare fund” account that you can set up (typically with your employer) that will put money in an account BEFORE taxes are taken out. It also reduces your adjusted gross income so you pay less in taxes. You can put up to $5,000 (2012) into this account to pay for daycare. So, how much does that save you in taxes? Well, for easy numbers, let’s say you pay 25% in taxes. $5,000 x 0.25 = $1,000. You saved $1,000 in taxes. When you pay your daycare money, you can then sign up for reimbursement from the account.
- This is the route we chose.
- The only thing bad about this was that since I don’t use my employer’s daycare, if my paycheck cycles aren’t in sync with daycare, its almost like I have to pay daycare first in order to get reimbursement. So its almost like I’m paying for daycare twice (once out of my paycheck, second out of my checking account), but getting reimbursed later. Hope that makes some sort of sense.
- Big Tip: You can request reimbursement up to the following year by March 15!! What’s cool about this is that if you are preggers before your employer’s enrollment period, you can take advantage of estimating out how much daycare costs up to March 15 – and still get reimbursed for those. Since your expenses might be more than, $5,000 in the following year – you can at least save money on the previous year! Its awesome.
Dependent Tax Credit: As quoted from Kiplinger, “This can help lower your tax bill if you don’t have a flexible spending account at work, and it’s most valuable for people with very low incomes. To qualify for the dependent-care credit, you must pay someone to watch your child, who has to be younger than 13, while you work or look for work. Both spouses must have earnings from a job or self-employment, unless one is a full-time student. You can take a 20% to 35% credit for up to $3,000 in child-care expenses for one child (the higher your income, the lower the percentage) or up to $6,000 in child-care expenses for two or more children. That means the credit ranges from $600 to $1,050 if you have one child, or $1,200 to $2,100 if you have two or more children. And remember that a tax credit lowers your tax liability dollar for dollar. But you’ll qualify for that maximum credit only if you have a very low income – currently less than $15,000. If your income is more than $43,000, you’ll qualify for the 20% break, which means that if you have $5,000 in child-care expenses, you’d get a tax break of only $1,000.”
Using both accounts if you have more than $5,000 in expenses: If you have two or more children and child-care expenses exceeding $5,000, you might be able to benefit from both the FSA and the dependent-care credit. You can set aside up to $5,000 in pretax money in your FSA, and claim the dependent-care credit for up to $1,000 in additional expenses.
- For baby number two, that’s good news. An extra $200 (even though I’m shelling thousands more).
Here’s some terminology that often gets confused:
- Dependent Care Account = Flexible Spending Account = FSA
- Dependent Care Tax Credit = Child Care Tax Credit
- Child Care Tax Credit DOES NOT EQUAL Child Tax Credit (a separate tax credit on its own)
My post will be my final post on baby finances (at least for this year) on the Child Tax Credit.
More information can be found: