U.S. Child Care Costs Keep Rising. This Account Could Help You Save on Them

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There’s a step you can take to ease the burden of child care costs. Read on to find out what it is. 

There’s a reason soon-to-be parents are advised to save money before bringing children into the world. The cost of child care can be exorbitant, and it only seems to rise over time.

An estimated 67% of parents spend 20% or more of their household income on child care, according to recent data from Care.com. And on a national level, it costs an average of $284 a week to put a child into daycare. That’s up 53% from 10 years ago, when the average cost for a week of daycare was $186.

If you’re struggling to keep up with child care costs, you may be wondering if it’s even worth it to hold down a job. And the answer will depend on your household’s situation.

For many people, giving up a job means giving up health insurance coverage. And the cost of securing coverage independently could be astronomical. So some parents might decide to stick with a job for that reason alone, even if child care costs virtually eat up their entire paycheck.

But there’s one step you might be able to take to lower your child care costs in the form of tax savings. So it’s worth seeing if it’s an option your employer offers.

When you get a tax break on child care

The ability to lower your taxes is huge, as it could put a lot more money back in your pocket. And that’s why it pays to see if your employer offers a dependent care FSA.

Many people are familiar with an FSA, or flexible spending account, in the context of healthcare expenses. But there’s a dependent care version that allows you to sock away up to $5,000 a year for child care costs if you’re single or married and filing a tax return jointly. If you’re married but file a tax return separately from your spouse, then your dependent care FSA limit is $2,500.

As is the case with a healthcare FSA, to use a dependent care FSA, you must show proof that you’re paying for child care. A statement from your daycare provider, for example, will suffice. And you also have to use up your plan balance every year or risk forfeiting funds. But seeing as how expensive it’s gotten to put a child into daycare, if you’re paying somewhere in the ballpark of $284 per week, you should have no problem spending down a $5,000 balance in a year.

Also keep in mind that this $5,000 balance is per household, not per child. If you’re married and filing jointly with three kids, you get the same $5,000 limit as a household in that boat with one child.

A benefit worth exploring

A dependent care FSA won’t lower the cost of child care. But you can fund one of these accounts on a pre-tax basis to shield some of your income from the IRS.

As an example, let’s say you put $5,000 into a dependent care FSA this year and your tax bracket based on your earnings is 22%. Your FSA would save you $1,100.

Usually, you have to fund a dependent care FSA before the start of a new calendar year. But if you didn’t sign up for a 2023 dependent care FSA last fall when your employer offered that option, but you had a baby in 2023, then you should be allowed to participate now because of that qualifying life change. Talk to your benefits department to see what options are available to you.

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