Saving Money on Child Care: 6 Tips New Parents Need to Know

We’re looking at childcare now and it’s incredibly expensive. The sticker shock isn’t surprising to many parents but for me it is, as it’s my first real interaction with the costs. We have to send our daughter to daycare — my wife wants, and frankly needs, to head back to work — but it’s still a big lift financially. As we’re searching, what are some things to keep in mind to offset the costs? I know there are some tax write-offs and maybe some flex spending help, but what do I need to know? Help.” — Howard J., Louisville KY

Parenthood is nothing if not a crazy whipsaw of emotions. The best chaser for the elation of having a new child? Mylanta. The price of bringing that baby into your life is massive. Not least of the expenses will be paying someone to take care of your little one when you and your spouse head back to work. It’s a financial challenge no matter where you live, but in some parts of the country it’s an absolute stress inducer.

In Washington, DC, the average daycare cost for an infant is $1,886 a month, according to the Economic Policy Institute, and in Massachusetts, it’s a hefty $1,422 each month (though it’s slightly less for toddlers). Even in otherwise low-cost areas, child care can be a sizeable outlay. A typical set of parents in your state, Kentucky, will still fork over $525 a month in daycare fees for their baby.

Take advantage of the tax code

Fortunately, it’s not all doom and gloom. As you point out, the IRS offers some important tax breaks that take at least part of the financial strain off your shoulders. Among them: dependent care flexible spending accounts, which let you pay for a broad range of providers – including daycares, preschools, nannies and day camps – with pre-tax dollars.

The catch is that your employer needs to offer FSAs as part of their benefits menu. If it does, you can sign up during the annual open enrollment period and choose a contribution amount. Parents can deduct up to $5,000 a year if they file a joint return or $2,500 if they file separately.

Because it’s a deduction, the amount of relief you get depends on your tax bracket. But the program website says the average family saves around 30 percent off their costs. Certainly, it’s enough to make a nice dent in most cases.

Alternatively, you can claim the child and dependent care credit, says Marguerita Cheng, CEO of Gaithersburg, Maryland-based Blue Ocean Global Wealth. Like dependent care FSAs, it helps offset the cost of daycare, sitters and some summer camps for your children under the age of 13.

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The credit is worth up to 35 percent of qualifying expenses of $3,000 for one child or up to $6,000 for two or more kids. In order for the child care expense to qualify, parents must use the provider so they can either work or look for a job. While most parents should opt for an FSA if they can, the child care credit tends to be a better choice for parents in one of the lower tax brackets.

Ordinarily, you can’t use flex dollars and claim the child care credit, too. But there is a carve-out for parents with multiple dependents, who can use their full $5,000 FSA allowance and then claim the credit for an extra $1,000 in expenses.

Keep in mind, too, that nearly half of the states have dependent care tax breaks that allow you to save on their income taxes as well. Needless to say, it pays to do a little homework on your local laws. Here are some other options to consider.

Make alternate arrangements

To keep costs down, you might also consider alternate child care arrangements that often cost less than five-day-a-week daycare programs. For example:

Lean on family

Not every grandparent has the energy to chase small kids around all day. But if they can pick up some of the load, it’s a great way to cut down on daycare fees. Cheng says her parents lived close enough that they could pick her daughter up from preschool when she was little, saving the mother of three serious cash and creating a bond between her daughter and her grandparents.

Alter your schedule.

Good employers realize that parents need a work-life balance. If you can work from home once a week – or work four 10-hour days instead of a standard workweek – that’s one less day you have to pay for.

Consider home-based centers

Business Broker Network did a study of child care costs last year and found that, in all but one state, home-based daycare centers were less expensive than standalone facilities. And in the vast majority of cases, they were at least 20 percent cheaper. If you can find one you’re comfortable with, you’ll usually save this way.

Explore cooperative preschools

When your kids are old enough, cooperative nursery schools can be a less pricy alternative to more traditional models. Rather than hiring a teacher’s assistant, the school asks parents to volunteer in the classroom a few times per year. Cheng used a coop for her children’s early education and was happy she did. “It may not be for everyone, but I thoroughly enjoyed the experience,” she says.

Sadly, there’s no magic wand to erase the daunting bills that usually accompany child care. But if you examine your options, you can usually find ways to make it more bearable. I hope this helps.