According to a report from the National Women’s Law Center, women make up the majority of the COVID-19-related job losses. Even as the economy rebounds, many people (mothers included) have chosen to leave their jobs or not return to the workforce. And who came blame them? With school and daycare shutdowns, kids at home in quarantine taking virtual classes, and ever-changing schedules, it’s been difficult to work and provide childcare at the same time in 2021.
For parents whose jobs went virtual due to the pandemic, 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.
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 2022 benefits during open enrollment. 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 flexible spending account (FSA) is a pre-tax benefit account used to pay for eligible dependent care services, such as preschool, summer day camp, before or after school programs, nannies and babysitters, and daycare.
A dependent-care FSA lets you set aside funds 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 maximum you can set aside in 2022 is $5,000 per household for individuals or couples filing jointly or $2,500 for a married person filing separately. You can then use the money tax-free to pay for the cost of daycare, preschool, a nanny, 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 2022, even though it might be difficult. 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.
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 the same child care costs for kids under 13 while you and your spouse work or look for work.
Under current law, the child tax credit will revert back to the pre-2021 amount of $2,000 per eligible child, subject to income phase-outs, says Tom DiLorenzo, Senior Manager EY Personal Finance. “The most recent version of the Build Back Better proposal would extend the expanded child tax credit amounts of $3,000 and $3,600 for the 2022 tax year, however as of today no legislation has been enacted,” he says.
The lower your income, the larger the credit you can receive, but there’s no maximum income limit to qualify.
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 if you have three children you may be able to use the $5,000 limit for the dependent-care FSA and take the child care credit to bridge the gap in expenses for your eligible children.
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.
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