The pandemic has been difficult for everyone, and especially challenging for working mothers. With school and daycare shutdowns, kids at home taking virtual classes, and ever-changing schedules, it’s been difficult to work and provide child care at the same time. For parents whose jobs went virtual this year it’s been incredibly hard to manage, and nearly impossible for those who have to go to an office in person, or who have front-line jobs. A study by Catalyst found that 71% of the working mothers said they have had to modify their work routine to adapt to their caregiving responsibilities because of COVID-19. Nearly half of the parents surveyed were concerned that they will have to reduce their hours, go part-time, or quit their jobs temporarily if schools don’t fully reopen.
It’s more important than ever to make the most of any child care benefits provided by your employer as you sign up for your 2021 benefits during open enrollment this fall. If you or your spouse’s employer offers a dependent-care flexible-spending account, it’s a good idea to consider this tax-advantaged account, even if you haven’t needed it in the past.
If You Have One, Look To Your FSA
A dependent-care FSA lets you set aside up to $5,000 pre-tax each year to pay child care expenses for kids under age 13 while you and your spouse work or look for work. (The $5,000 is per household, not per person.) You can then use the money tax-free to pay for the cost of daycare, preschool, a nanny, babysitter, before- and after-school care, and even summer day camp (but not overnight camps).
Your contribution goes into the account before taxes, which can help stretch your child care money. If you contribute $5,000 and are in the 24% income-tax tax bracket, you could save about $1,583 in taxes by contributing to the account because the money avoids federal income taxes and the 7.65% Social Security and Medicare taxes (FICA).
Some people are worried about contributing to a dependent-care FSA because of the use-it-or-lose-it rules – you usually have to use the money before the end of the year or you lose it. Try to estimate what your child care expenses may be for 2021, even though it’s difficult to predict what will happen to school and work next year. Your employer may also let you change your contributions mid-year if you have a change in the cost of care or change in the employment status for you or your spouse, or a few other reasons. Also keep in mind that summer camp and many programs during school breaks are eligible expenses, which may help you use the money even if your daily child care expenses eventually go back down (such as if your child’s school starts back up in person in 2021).
With No FSA, Look To The Child Care Tax Credit
If your employer (or your spouse’s employer) doesn’t offer a dependent-care FSA, or if you didn’t sign up for the benefit, you can still get a break with the child care tax credit. The criteria and eligible expenses are similar to those of the dependent-care FSA: The credit applies to same child care costs for kids under 13 while you and your spouse work or look for work.
The child care tax credit can be worth 20% to 35% of up to $3,000 in child care expenses for one eligible child, or up to $6,000 in expenses for two or more children. That means the credit can lower your tax bill by $600 to $1,050 for one child or $1,200 to $2,100 for two or more children. The lower your income, the larger the credit you can receive, but there’s no maximum income limit to qualify. If you earn more than $43,000, the credit is worth 20% of your eligible child care costs.
You can’t double dip and take the child care tax credit for the same expenses you paid with money from your dependent-care FSA, but since the dependent-care FSA limit is $5,000 and the child care tax credit counts the first $6,000 of child care expenses if you have two or more children, you may be able to take the child care credit for up to $1,000 in expenses if you have two or more eligible children and your child care costs are $6,000 or more, even if you’ve contributed the maximum $5,000 to the dependent-care FSA.
This has been a difficult year for everyone, especially for parents of young children, but many employers have been expanding their benefits to help families make it through these challenging times. When you’re signing up for your employee benefits for the year, also find out if your employer is offering any other breaks to help with child care, such as flexible schedules, special care programs (especially for essential workers), expanded mental health benefits, or other assistance. Look into these programs and benefits before making any move to leave your job, which could have a much bigger impact on your long-term financial situation.
MORE ON HERMONEY:
- 5 Questions You Must Ask Any Financial Planner Before Working With Them
- 10 Steps For A Successful Mid-Year Financial Check-Up
- How To Curb Financial Anxiety
- How To Treat Yourself When You’ve Hit A Financial Milestone
SUBSCRIBE: Own your money, own your life. Subscribe to HerMoney to get the latest money news and tips!