This month’s insight from Marguerita Cheng, CFP® Pro: As parents and professionals, we all strive to have the best of both worlds. We want our children to receive the best care while earning a living. However, as the cost of living rises, the balance between our worlds becomes unsteady.
Reality check: According to the Center for American Childcare, families spent 7.8 percent of their monthly income on childcare at professional centers last year. Often, this expense is higher than a year’s tuition at the average four-year public college.
I speak from personal experience. In 2009, the cost of tuition for my youngest daughter’s pre-school in the Washington, D.C. metropolitan area was $13,200. In 2014, my eldest daughter’s college tuition at the University of Maryland College Park was $11,400.
While this may seem a cause for concern, there are ways to save money and regain balance.
- Dependent Care Flexible Spending Account: Most companies offer a benefit called a Dependent Care FSA, which allows an employee to use pre-tax dollars from their paycheck to pay for expenses related to care for a child, disabled spouse, elderly parent, or another dependent to work or attend school. The minimum and maximum amounts that you can contribute to the Dependent Care FSA are determined by your employer. The maximum allowed by the IRS is $5,000 a year for individuals or married couples filing jointly or $2,500 for a married person filing separately. The amount that you contribute to a dependent care FSA will be included in box 10 of your W-2. Remember that married couples have a combined $5,000 limit, even if each spouse has access to a separate FSA through their employer.
- Tax deductions: According to the Internal Revenue Service, if you paid someone to care for your child, spouse, or dependent last year, you may be able to claim t e Child and Dependent Care Credit on your federal income tax return. The alternative to using a Dependent Care FSA is to use a dependent care tax credit when you file your federal income taxes. The preferred method will depend on your income, the number of eligible dependents, and other factors.
- The Dependent Care FSA usually provides a more significant tax advantage. For most families, especially as their household income increases. It’s essential to consult a tax advisor to help determine which method is suitable for your situation.
Here are some other options to consider:
- Babysitter/Nanny: Who doesn’t remember making some extra cash as a teen by watching the neighborhood kids? Times have changed, and babysitters are no longer making $2 per hour. According to Payscale, babysitters now make between $10 and $15 per hour. This rate may seem steep but consider enlisting a relative to watch the kids for a few hours to offset some costs. If the kids are in school, you may only need a babysitter in the morning to send the kids off to school, and in the afternoon to watch them for a few hours after school until you get home. Some families are opting to share a nanny. When my older two children were in pre-school, I knew of a family who shared a nanny on alternate days. The parents in each family worked from home one day each week. It took coordination and cooperation, but they made it work. The nanny was able to secure full-time hours. The families had the opportunity to share costs.Care.com explains the typical nanny share arrangement where two or more families employ one nanny, sharing the cost of her salary and benefits. Some parents work together to develop a schedule that best fits their work schedules. Since both families contribute to the nanny’s pay, the nanny can usually earn more. It is a win-win for the parents and the nanny.
- Au Pair: An Au Pair is a caregiver who provides a unique cultural experience and has a live-in option. The U.S. Dept. of State regulates all Au Pair agencies. Although higher in affluent areas, the typical wage can be as low as $7. To comply with IRS guidelines and avoid any misunderstanding, it’s essential to disclose whether the compensation is gross or net and what deductions, if applicable, will occur. If you offer compensation net of Federal and state taxes, clearly communicate whether you are paying U.S. Social Security/Medicare taxes only for the employee.
Keep in mind: You cannot claim the same expenses on both your federal income taxes and Dependent Care FSA (DCFSA), although in certain situations, you may be able to take advantage of both the DCFSA and the Child and Dependent Care Tax Credit.
If you have two or more dependents, the IRS allows you to apply up to $6,000 of dependent care expenses to your taxes. The maximum allowable under a DCFSA is $5,000. You may apply the $1,000 incremental difference between the DCFSA maximum and the Child and Dependent Care Tax Credit if you have two dependents and your expenses exceed $5,000. Consult your tax advisor to determine which option is best for your situation.
The bottom line: Hardworking parents shouldn’t have to stress over how to pay for childcare. Allowing time for careful research and input from other parents will help moms and dads find quality care for their children.
About Marguerita M. Cheng, CFP® Pro: Rita is the founder and Chief Executive Officer of Blue Ocean Global Wealth. She has also been a spokesperson for the AARP Financial Freedom Campaign and a regular columnist for Investopedia & Kiplinger. Previously, she was a Financial Advisor at Ameriprise Financial and an analyst and editor at Towa Securities in Tokyo, Japan.
Certifications: CFP® professional, Chartered Retirement Planning CounselorSM, Retirement Income Certified Professional®, and a Certified Divorce Financial Analyst. As a Certified Financial Planner Board of Standards (CFP Board) Ambassador, Marguerita helps educate the public, policymakers, and media about the benefits of competent, ethical financial planning. She serves as a Women’s Initiative (WIN) Advocate and subject matter expert for CFP Board, contributing to the development of examination questions for the CFP® Certification Examination.
Awards: Ameriprise Financial Presidential Award for Quality of Advice and the prestigious Japanese Monbukagakusho Scholarship. In 2017, she was named the #3 Most Influential Financial Advisor in the Investopedia Top 100, a Woman to Watch by InvestmentNews, and a Top 100 Minority Business Enterprise (MBE®) by the Capital Region Minority Supplier Development Council (CRMSDC).
Rita volunteers for several organizations: CFP Board Disciplinary and Ethics Commission (DEC) hearings, she has also served on the Financial Planning Association (FPA) National Board of Directors from 2013-2015 and is a past president of the Financial Planning Association of the National Capital Area (FPA NCA).
Blue Ocean Global Wealth headquarters:
9841 Washingtonian Blvd., #200
Gaithersburg, MD 20878
301.502.5306 / 888.731.3117 (fax)