21

My wife and I are expecting our first child later this year and I have been budgeting to see what we can afford for child care. It looks like the average cost of childcare is ~$1000-$1200/month. This is a huge expense for us that we did not have before. We cannot afford to have either myself or my wife take care of the child instead of working so we must use a daycare.

I have a budget and we save ~$1700/mo without spending anything on things like dinners out, movies, tools for the house, etc.

I am not willing to forgo our decent chunk of savings each month to pay for child care as only saving ~$500/mo scares me.

We bought a house last year and we were wondering what kind of benefit we would see around Tax time for: 1) Living in our own house for (1,2,3...) year(s), 2) Having a child. I know I can increase the number of depends on my tax forms once the child is born, what should I expect in my paycheck once that happens?

I have a car payment and I was hoping to pay that off as fast as possible to try to get rid of some debt to increase our cushion a little.

  1. Is there anything else I can be doing?
  2. What kind of return will I see from renting vs owning for a year(2, 3..)
  3. How will my income change once i claim another dependent?

thanks,

  • 14
    Depending on how much the wife earns, it can be cheaper -- or almost the same -- for her to quite payed work for a few years. Sure, there would be less income, but also fewer expenses (beyond just the lack of childcare costs). – RonJohn Jan 22 '18 at 16:21
  • 32
    When you have a kid, things change drastically. You must be willing to forgo some things such as larger savings contributions. This isn't an old car you want to get restored that you don;t want to spend too much on. This is a child. Weigh the cost benefit of child care and your wife not working. Maybe try to look for a promotion or new job where you can take in a little bit more money. A $500 buffer isn't much, especially considering all the other enormous costs associated with raising a child. – Michael Hartmann Jan 22 '18 at 16:29
  • 28
    @RonJohn why do you suggest having the wife quit as opposed to OP ? Is there a tax reason or a detail in the question I'm missing? – temporary_user_name Jan 22 '18 at 21:27
  • 24
    Having a spouse quit their job to cover childcare is MASSIVELY expensive in the long run. It is not simply a matter of lost wages during that time period, but lost experience, lost promotions, potentially the loss of their entire career if they can't find a new position after they want to return to the workforce. Don't make such decisions lightly or without considering the long term impacts. – Glen Pierce Jan 22 '18 at 23:34
  • 18
    @Wildcard I think Aerovistae was questioning – as I was about to do – the fact that at least two commentators seemed to automatically suggest that the wife should quit her job. Given there's nothing in the question to suggest a preference (e.g. who is the higher earner; whether one of them is "just working" as opposed to "in a career") then those suggestions should have been "Consider one of you quitting their job...". – TripeHound Jan 23 '18 at 8:11
30

I feel like you're getting overwhelmed with all of the variables and possible scenarios and are trying too hard to optimize your taxes and budget. I would suggest simplifying things and not trying to polish too much.

When expecting a child or any other significant life changing event, it is often wise (and helpful emotionally) to save up as much cash as possible in the event that things do not go as planned. Yes, you could reduce your withholding in preparation of a lower tax bill due to an extra dependent, but you won't know exactly how much that impact will be until you file your taxes, so I would not decrease them too much until you have a better understanding of what expenses will be deductible or what tax credits you will be eligible for.

If it were me, I would put as much of the $1,700 per month in something relatively safe and liquid (e.g. not bitcoin or single stocks, maybe a 6-month CD or low-risk mutual fund, but not something that's going to freak you out by losing 10% of its value).

When the baby comes, if something unexpected were to occur (medical bills, etc.) you have the reserves to cover it without panicking and making an unwise decision out of fear. If nothing goes wrong - GREAT! you have reserves that can be used to pay off the car, or pay down the mortgage or other debts.

Come tax time, You will likely have a decent refund that can ALSO be used to improve your situation. You can also adjust your withholding if you want to realize the tax savings throughout the year instead of getting a large refund.

Now, for the daycare expense. If you cannot afford for one of you to stay at home, then you have an expense that you need to plan for. I realize that tapping into your savings budget is disheartening, but you have three options:

  • Increase income (or sell stuff)
  • Reduce daycare expenses (finding someplace cheaper? getting help from friends?)
  • Reduce other expenses (or savings)

Mathematically, there's really not another way around that.

  • 7
    +1 Without increasing income, it is a zero sum game... Mathematically. – Fixed Point Jan 22 '18 at 19:29
  • to clarify: DO NOT pay that car payment off as fast as possible! – Mooing Duck Jan 23 '18 at 1:56
  • If it's an expensive car, it should be sold immediately - cut losses - a total waste of money. – Fattie Jan 24 '18 at 23:48
15

The bottom line is that children are expensive. It is highly unlikely that you will recoup a significant costs of having children through tax savings. While many parents go overboard on spending, finding a high quality day care is necessary. Skimping too much on day care is not worth the cost savings.

To further complicate matters, most high quality day care's require you to pay for 5 days per week even if you use less. Many have waiting lists. I have heard of parents paying for child care even prior to their child being born in order to hold a spot open in a very desirable provider.

Given the very binary tone of your question, the choices are: give the child up for adoption or reduce savings. In other words, you have to reduce savings. Welcome to parenthood. As you progress through the various stages, you become more and more thankful for your own parents and grandparents.

  • 1
    You could always start a daycare to make money, if they are that much in demand :P – user253751 Jan 22 '18 at 23:10
  • 7
    @user20574: Being in high demand doesn't mean they're profitable or easy to start. Doing it legitimately requires licensing and vetting/hiring people with the right skills and training. – R.. Jan 22 '18 at 23:13
  • 1
    @user20574 It does suggest that either they're profitable or their true cost to supply is more than anyone wants to pay. It doesn't mean they're easy to start. – user253751 Jan 22 '18 at 23:26
  • 3
    Most daycare workers do not earn enough to put their own children in daycare. – pojo-guy Jan 22 '18 at 23:33
  • 9
    Oh, it's tagged united-states. That would explain the horrific cost and availability problems. – Nij Jan 23 '18 at 6:56
9

First thing, it's scary having your first but you'll work it out. Just breathe.

The good news is that you can afford daycare! You will even have money left over at the end of the month so you can buy diapers. This is not a terrible position to be in. You just need to figure out some ways to save money.

If your job and/or wife's job offer dependent-care FSA, you should really consider using it. Basically it reduces the cost of you FSA by your top tax rate. Let's say you are in a 25% top bracket. Normally you would need to earn $19,200 to pay for a year of childcare. But if you do the FSA, $5K of your income will not be taxed. That's around $100 a month in post-tax money right there if you contribute the full $5000.

Due to the new tax bill, owning a home will likely not help you unless you have a lot of itemized deductions aside from the home. So that doesn't really matter. The 'return' of renting versus owning will simply be the difference in monthly payments (don't forget maintenance.)

You will get no longer get a significant tax savings through an additional dependent under the 2018 tax bill. This has been eliminated.

What else can you do? There are lots of ways to save money like using coupons. Be careful with the trips to the Home Depot. Make sure you are buying things you really need. Cooking at home (including lunches) can save real money. One thing you mention is "pay that off as fast as possible to try to get rid of some debt to increase our cushion a little". At a high level it's good to pay off debt but don't do it at the expense of your rainy-day fund. You could end up in a situation where you own the car outright but can't afford to repair it or buy new tires. It's even possible to end up in a situation where you have one payment left and something goes wrong, you have no cash and the repo-man takes it away.

The reality you need to deal with is that you will be spending more than you are now. Just accept that for the next few years you will be saving less. If you do have extra to save, it might be a good idea to reduce your taxes using a tax-sheltered account like a IRA or 401K.

  • 1
    You should note that the marginal value of the dependent care FSA is less because it is a dollar-for-dollar reduction of the child & dependent care tax credit. I contribute $5K to FSA, which means my tax credit (at the 20% phase-out) drops from $1200 (multiple kids) to $200. Thus my savings is the differential between my marginal tax bracket (federal plus state/local) and the phaseout (20%) It's still a good idea (especially for high-tax states) but just not a silver bullet. – C8H10N4O2 Jan 23 '18 at 14:41
  • 1
    @C8H10N4O2 You should also factor in the FICA/Soc.Sec. savings there. – Joe Jan 23 '18 at 15:37
  • @Joe Yes, that's also true, except for incomes above the Soc.Sec. cap. Medicare tax savings regardless, I believe. Also to make a perfect comparison, consider the hassle and opportunity cost of the delayed reimbursement. – C8H10N4O2 Jan 23 '18 at 16:10
  • Is it still true in 2018 that you will get significant tax savings from an additional dependent? – Eric Jan 23 '18 at 16:12
  • @C8H10N4O2 Remembering to file fore reimbursement is definitely important... though I have typically been able to get it without any significant delay. Since you typically have way more in expense than the $5000, and DCFSA isn't fully reimbursible up front (like HCFSA is), you just put in your receipts for the first month or two and then once or twice more throughout the year, and constantly get a check alongside your normal paycheck of the withheld (now tax-free) amount. – Joe Jan 23 '18 at 16:20
2

Daycare is definitely expensive - and it sort of has to be, when you think about it; particularly at the infant age, you need one caretaker per 3 children, meaning you're paying at least 1/3 of a person's salary (plus employment taxes), plus the other costs of the daycare (administrative staff, building, consumables, furniture upkeep, etc.), plus some minimal profit (and it's minimal). $12k annually is cheap - I paid $475 a week for my first (almost $25k annually), in a major city in a daycare center.

Besides the good suggestions here - largely the FSA or childcare tax credit - you can't really reduce things on the tax side, but you can make some choices. I assume here that both parents want to continue working (whether because it makes financial sense or because they both wish to), and that there are no relatives in the area that can help take care of kids - grandma and grandpa are the cheapest daycare for many, after all.

Depending on your work flexibility, for example, it may be possible to find a cooperative arrangement with other parents in your area where one of you watches several children each day, rotating days.

You may be able to reduce the total days in daycare if you can rearrange your working days, also; this is probably more feasible than a cooperative unless you have a lot of friends in similar situations. You could switch working Thursdays with Saturdays, for example; then you only need four days coverage. And if your wife worked Sundays instead of Tuesdays, you need only three! (Of course, then you don't have any days to do other fun things together, but that's the choice you would have to make).

You also can often reduce the hours in daycare; for example, one of you works 7-4 one 9-6. Then you only need coverage 9-4. Maybe you can even adjust it further, like 7-4 and 11-8. Or perhaps one of you goes down to part time, and works 3 days a week, one not overlapping with the other parent, meaning you only have two days coverage needed.

All of these are still compatible with the tax credit and/or FSA, as both parents are working at least half time, though I wouldn't factor those trivial amounts into anything as they're not that large (maybe $1500 a year at most).

Beyond that, though, you're really just going to have to spend some of that money. You're probably going to have to save less, as unfortunate as that is; but children are very expensive. And don't imagine that it actually gets much cheaper once they hit five and go to kindergarten; there's still lots of stuff going on then that costs money, more expensive clothes, after school care, summer camps, soccer teams... it goes on and on. Kids are expensive, there's no getting around that.

1

There are tax benefits that somewhat offset the costs, but they're fairly small:

  • Exemptions (line 42 on 1040). You can subtract $4050 (2016; may differ in future) per dependent in computing your taxable income. This will translate into a reduction in tax of $1000-1300 for most people.
  • Child tax credit (line 52). Each child reduces your tax amount by $1000.
  • Child care credit (line 49). You can get a credit (reduction in tax amount) for up to $3000 of child care expenses per child, but it's scaled down by income; at moderately high income it bottoms out at only 20% of that ($600 per child), so like half a month of actual daycare costs.
  • Health insurance subsidy. If you purchase your own health insurance on the ACA marketplace, your eligibility for and amount of subsidy are based on your income relative to the federal poverty line for your household size. For a certain middle-class range of incomes (probably around $40k-60k/yr but do the math) you could easily go from paying hundreds or over a thousand a month out-of-pocket for an insurance premium to paying nothing by adding a child. At somewhat lower incomes (around $27k) you could even become eligible for Medicaid (if your state accepted federal funding to expand Medicaid).

(Disclaimer: none of this is professional tax advice, and there are some limitations depending on your type and amount of income. Also I'm told that the new tax law has eliminated exemptions but increased the child tax credit, so OP may see less benefits than what I described based on old law under the new law.)

From personal experience: yes, daycare is expensive. If one parent has a low-income job, it's a lot more expensive than them just staying home and forgoing that income. However you also have to consider things like how that influences your quality of life, how you'll make opportunities for your children to develop early social skills, and if you opt to do it in the conventionally patriarchal framework, what lessons that teaches your child about the relative worth of men's and women's labor. As such I believe it's a positive thing despite being expensive.

  • 1
    The new tax law has eliminated exemptions in favor of increasing the standard deduction. The OP is having a child in 2018 so does not have to deal with how taxes worked in previous years. – Eric Jan 23 '18 at 16:15
  • @Eric True, but the child tax credit has doubled, which may more than more than the loss of the exemption. – lzam Jan 23 '18 at 17:04
  • 2
    @Izam True, but this answer is still using the 2017 rules and numbers so will not help the OP in estimating 2018 taxes. – Eric Jan 23 '18 at 17:35
  • Indeed, I haven't had time/occasion to learn the new tax rules, so this information may be outdated. – R.. Jan 23 '18 at 22:58
0

If your employer offers a FSA (flexible spending account) benefit, you can put up to $5000 per year pretax into this account and use it for child care expenses. It is worth noting that the birth or adoption of a child is one of the life events that should allow a change in your benefits.

If your employer doesn't offer this, there is a corresponding credit you can use on your return, but there's more calculations and paperwork for you involved in this path - if you aren't covered by an employer's FSA there is a max() function on several calculations depending on your gross level of income, you can claim the credit on 35% to 20% of the total expense, or an absolute maximum cap of $5000. I also do not know if this is changed by the 2018 tax bill (the internet suggests employer FSAs are unchanged)

Daycare cost for "infants" (6 weeks to half year) in my area tends to be a few hundred higher per month than toddlers and older; if you and your wife have enough vacation time, sick time, nearby grandparents, FMLA, etc. to plan for 6 months of coverage, you can get into the cheaper window before paying for external daycare.

  • 2
    Childcare credit expense cap is $3K per child, $6K per family. – TTT Jan 22 '18 at 19:05

Not the answer you're looking for? Browse other questions tagged or ask your own question.