Sensible Cash Podcast: Nerdy Deep Dive: How you can Cut back Youngster Care Prices

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Welcome to NerdWallet’s Sensible Cash podcast, the place we reply your real-world cash questions.

This week’s episode is a Nerdy deep dive into the price of baby care.

Take a look at this episode on both of those platforms:

On this two-part Nerdy deep dive, we go behind the scenes to untangle one of many largest funds objects for a lot of households: baby care prices.

In Half 1, we spoke with baby care reporters and coverage consultants to higher perceive what’s damaged within the present U.S. baby care system and why prices are so excessive for folks. We additionally heard from listeners throughout the U.S. who shared their baby care tales and the way exorbitant prices have negatively impacted their budgets.

In Half 2, we spotlight monetary sources for folks on the federal and state ranges: the kid tax credit score, baby and dependent care credit score, and earned earnings tax credit score (EITC). We additionally clarify federal protections, like FMLA, and employer-sponsored advantages, like dependent-care FSAs and paid go away.

A few of these applications require dad and mom to pay upfront and get reimbursed, which generally is a problem. Different advantages permit dad and mom to take cash out of their salaries pre-tax to assist offset prices.

We additionally focus on private finance ideas for folks trying to make modifications to their budgets. Holding tabs on variable prices — bills that change month-to-month — may help you establish potential locations to chop prices.

Mother and father must also take into consideration their long-term monetary safety and objectives earlier than deciding to drop out of the workforce to tackle caregiving full time, even when one dad or mum’s wage goes primarily towards baby care prices.

Lastly, we communicate instantly to folks who’re grappling with the right way to pay for baby care prices. The underside line: It’s not your fault, and don’t be afraid to make use of your voice.

Extra on tax credit for folks from NerdWallet:

Sean Pyles: Welcome to the NerdWallet Sensible Cash Podcast. I am Sean Pyles.

That is Half 2 of our Nerdy deep dive into the price of baby care. On this episode, Amanda Barroso and Alieza Durana discover the non-public finance and tax methods to pay for baby care. Welcome again to the podcast, you guys.

Alieza Durana: Hey there, Sean. Thanks for the nice and cozy welcome.

Amanda Barroso: Hey Sean.

Sean Pyles: So within the first episode of the sequence, we talked concerning the numerous elements that make baby care costly, tough to seek out or aggressive to get into for folks. And listeners, for those who’ve not checked that out but, I extremely suggest that you simply achieve this.

And Amanda and Alieza, what do you’ve gotten in retailer for us this episode?

Amanda Barroso: On this episode, we’ll discuss with two of our very personal Nerds to be taught extra about tax breaks and employer advantages that we predict dad and mom ought to pay attention to, together with another methods that may assist dad and mom contemplate their budgets in the long run. We additionally communicate to an early childhood training advocate, Mai Miksic, from Pennsylvania.

Alieza Durana: You are going to hear her experience woven all through this episode, alongside some Nerdy consultants of our personal. Right this moment, we’re drafting tax Nerd Sabrina Parys to assist us decipher potential tax advantages.

We’ll be discussing 4 most important insurance policies: the kid tax credit score, the kid and dependent care credit score, the earned earnings tax credit score, and employer-sponsored dependent-care FSA applications. Whoa, what a mouthful.

Amanda Barroso: Sure, very a lot so. And one fast notice earlier than we transfer ahead and find out about all of those is that we’re not monetary or tax advisors, and this information is for normal academic functions.

Now that we have got that out of the way in which, let’s welcome tax Nerd Sabrina.

Sabrina Parys: Hey Amanda and Alieza, thanks for having me on the podcast.

Amanda Barroso: We’re so joyful to have you ever right here to assist break down a few of this difficult and complicated tax stuff for us.

So to get began, inform me concerning the baby tax credit score. What’s it, who can entry it, and the way a lot of a dent can it make?

Sabrina Parys: The kid tax credit score was first launched means again in 1997 as a part of the Tax Payer Reduction Act. And the intention behind it, very similar to the title implies, was to supply some kind of monetary reduction to people with children.

So for those who’ve received qualifying dependents and also you meet sure earnings {qualifications}, you possibly can declare the credit score whenever you file your taxes.

An essential factor to notice concerning the credit score, although, is that it is partially refundable. Meaning it will probably probably decrease your tax invoice to zero for those who owe taxes. And for those who do not, or if it does minimize your invoice down slightly bit, it is doable that we get a portion of it again, not the total factor, as a refund.

Alieza Durana: How a lot can folks get, and who qualifies?

Sabrina Parys: So the precise credit score quantity can fluctuate 12 months to 12 months primarily based on issues like laws or inflation. However people who declare it could get a credit score of as much as $2,000 per dependent below the age of 17, and a few of that $2,000 could be probably refundable.

Now the precise quantity of credit score that folk will get will in the end rely upon numerous different elements, together with earnings.

And most significantly, it is advisable to have what the IRS calls a “qualifying baby.” The silver lining right here although, is {that a} qualifying baby is outlined fairly broadly within the eyes of the IRS. Meaning a qualifying baby generally is a organic baby, a stepchild, a foster baby, a grandchild, even a niece or nephew.

You simply should just remember to are rightfully claiming them in your tax return as a dependent. One other good little element is that households who typically do not file taxes resulting from their decrease earnings standing can file a easy tax return with a view to declare the credit score and probably get a few of it refunded.

Alieza Durana: What modified in 2021?

Sabrina Parys: Rather a lot. So the American Rescue Plan Act — that massive reduction package deal that was handed again in March of 2021 — modified fairly just a few issues concerning the baby tax credit score.

It expanded the tax credit score to a max of $3,600 per qualifying dependent. The tax credit score turned totally refundable.

And for the primary time in U.S. historical past, half of that credit score was additionally despatched out to people within the type of superior funds. The superior funds made it so that folk received month-to-month installments of as much as $300 per baby from July via December of 2021 as an advance, so they may instantly use that cash.

Usually, whenever you apply for a tax credit score, you need to wait till you file taxes in April, and then you definitely’ll get something probably refunded again to you. So the impacts of these superior funds had been enormous.

In actual fact, the Columbia College Heart on Poverty and Social Coverage estimates that the credit score briefly minimize baby poverty by 30%.

So the dangerous information right here is that until Congress acts to resume these modifications — and it isn’t trying like there’s a lot motion proper now — the tax credit score for 2022 will revert again.

Alieza Durana: Subsequent up, we have the kid and dependent care credit score. This credit score may help cowl the price of issues corresponding to day look after sure dependents, like children below the age of 13 or a partner or dad or mum who’s unable to look after themselves.

What are you able to inform us about this credit score, Sabrina?

Sabrina Parys: This credit score is supposed to assist people cowl the price of out-of-pocket bills that they made all year long for sure sorts of care offered to qualifying a toddler below the age of 13.

And the type of care that is thought-about a qualifying expense can embrace day care facilities, after-school applications, baby sitters, nursery faculty, preschool and even care offered by a relative.

However you possibly can’t declare that relative as a dependent. So, for instance, in case your 15-year-old is watching your five-year-old, that does not depend as a qualifying expense. For those who’re taken with the entire nitty-gritty particulars, IRS Publication 503 has the total particulars

And as with all credit although, there is a ton of fantastic print. So, for instance, you typically should earn some earnings all year long to qualify. And for those who share custody of your baby, you could must method making use of for the credit score slightly bit in another way. So ensure that to take a look at the IRS web site for the total particulars.

Alieza Durana: That is nice to know, Sabrina. How a lot is the credit score?

Sabrina Parys: So previous to 2021, you could possibly obtain as much as $1,050 for one qualifying particular person and as much as $2,100 for 2 or extra qualifying folks, and it was non-refundable.

In 2021, the American Rescue Plan made that credit score accessible to a a lot wider vary of parents. The credit score turned probably refundable. It elevated to a max of $4,000 for one dependent or $8,000 for 2 or extra.

Sadly, if there is no motion from the federal government to resume these enhancements, then that credit score for 2022 will revert again to its unique iteration.

Alieza Durana: Subsequent, we’ll discuss concerning the earned earnings tax credit score. It is not a toddler care-specific credit score, however it will probably, in principle, assist low- and moderate-income households get a refund that can be utilized for the price of working a family, together with baby care.

Sabrina Parys: The earned earnings tax credit score is a refundable tax credit score that is meant to assist low- and moderate-income households.

So, put plainly, for those who make under a specific amount of earnings every year, you would possibly have the ability to get a few of that cash again as both a refund or as a discount in your tax invoice. In 2022, probably the most you may make to qualify is round $59,000.

One other essential factor about that is that you do not essentially should have a toddler with a view to declare it, however the quantity you qualify for can enhance primarily based on the variety of children you’ve gotten.

There may be loads of that enjoyable, fantastic print to wade via. For instance, you need to meet sure earnings standards, your baby needs to be beneath a sure age. So for those who’re taken with all the particular particulars, we’ve an ideal breakdown of the entire {qualifications} on our web site.

And the IRS additionally has this actually helpful interactive qualifier device on their web site. You should utilize that to determine if it is the proper credit score for you.

And simply as a last notice: Making use of for lots of those credit normally means a barely delayed refund. So that you’d in all probability get it round mid-February. Or on this 12 months’s case, the IRS was experiencing fairly a little bit of backlog and delays. Lots of people received their refunds round March 1st.

Amanda Barroso: I am glad these tax credit exist. And now I do know much more about them. However I am questioning in the event that they’re actually serving to most households, simply merely primarily based on the large proportion of their budgets’ baby care is taking over.

So let’s hear what Mai has to say about this from her perspective as an advocate.

Mai Miksic: Most advocates aren’t actually proponents of those sorts of tax credit, as a result of they actually require households to have the ability to pay upfront. And for lots of households, that is simply not doable.

So these households normally are in a position to make the most of the kid care subsidies that the federal and state governments put out for households making lower than 200% of the federal poverty line, nevertheless it’s advanced. And tax credit, I simply assume, will not be a long-term resolution to the kid care disaster.

Amanda Barroso: Having the ability to entrance these prices appears to be an actual draw back to those tax credit. And within the meantime, you’ve gotten households who do not have that money in financial savings.

They usually might need to resort to placing these prices on a bank card, which may result in paying curiosity whilst you’re ready for that refund to come back in. And like Sabrina, you mentioned, the IRS will not be at all times on time, proper?

So there’s some uncertainty round when that refund will hit, which may trigger loads of nervousness for households.

So are employers doing something to assist their employees on their finish?

Alieza Durana: It is dependent upon your employer, nevertheless it’s a drop within the bucket. Some employers provide employer-sponsored dependent-care versatile spending accounts, or FSA applications for brief.

In case your employer provides this profit, you possibly can contribute your pre-tax earnings to an account you utilize to pay for baby care. So who does this profit Sabrina?

Sabrina Parys: Properly, this program is normally slightly bit extra advantageous to people who, for one, even have entry to them. Not all people does; not each employer provides it.

So, as you talked about, FSAs permit you to contribute as much as a specific amount of pre-tax funds every year to an account, and people funds can be utilized to cowl certified baby care bills.

Alieza Durana: For individuals who do have entry, Sabrina, how a lot can they contribute?

Sabrina Parys: So in 2021, the American Rescue Plan elevated the contribution restrict to $10,500 for many who are single or married submitting collectively, and $5,250 for many who are married submitting individually.

As of now, the 2022 quantities have reverted again to the usual quantity, which is sadly a lot decrease. It is about $5,000 for married submitting collectively and single, or $2,500 for these married submitting individually. And identical to the kid and dependent care credit score, particular guidelines apply in circumstances of custody or divorced dad and mom.

So just a few different particulars to say as a result of there are lots of elements to FSAs that may be tough to navigate.

It is also a use-it-or-lose-it sort of state of affairs. So you need to resolve how a lot you are going to contribute throughout open enrollment, which might be tough whenever you’re unsure what your state of affairs goes to seem like.

And also you typically have to make use of the funds that you simply put in an FSA in a 12 months’s time. If there’s something left over, you lose entry to it. Some employers do provide brief grace intervals, however at all times examine and perceive the phrases of your plan.

After which the opposite factor that I additionally wish to point out is you can make the most of each the kid and dependent care credit score, in addition to an FSA, however you need to keep away from what some folks name “double dipping.” That basically means you can’t get reimbursed for a similar bills that you’ll declare on that credit score.

Alieza Durana: So Sabrina, can dad and mom use these employer-sponsored FSAs to cowl issues like summer time camps, too?

I am fascinated with all of the dad and mom who’re struggling to piece collectively look after the summer time whereas they’re nonetheless working full-time, however faculties are out of session.

Sabrina Parys: That is an ideal query. And the excellent news is that sure, you should utilize FSA funds for numerous baby care associated companies.

It covers, kind of, the identical bills because the baby and dependent care credit score. So for qualifying dependents below 13, cash that is spent on summer time camps, day care bills, preschool, childsitters, and nursery faculty bills — all of these qualify.

After all, this is not an exhaustive listing, so there are loads of exceptions. For instance, you possibly can’t get reimbursed, as I discussed, for one among your older children watching a youthful one, and you can also’t get reimbursed for tuition for teenagers as soon as they hit kindergarten and above.

So if you wish to get an exhaustive listing, take a look at the IRS web site.

Amanda Barroso: After I spoke with Mai about utilizing FSA funds to cowl summer time camp prices, she talked about that some camps require all the prices upfront, which may quantity to a giant chunk of change.

This is what she needed to say about her expertise paying for summer time camp for her daughter this 12 months.

Mai Miksic: I truly used an FSA for that, as a result of I needed to pay one thing like $2,600 upfront for my daughter’s summer time camp.

I imply, my husband and I each work full-time jobs. We would have liked one thing that may give her an enriching, enjoyable summer time expertise that additionally would ensure that she was secure and occupied throughout these enterprise hours.

Alieza Durana: It is wild to assume that on prime of standard baby care prices, dad and mom are additionally having to pay quite a bit in summer time camps, which mainly perform as baby care when faculty is out.

And whereas FSAs are a technique to assist save for these prices, these applications will not be provided by each employer. And even then, FSAs solely cowl a small portion of the overall prices many households are paying to ensure their children have a secure and ideally enjoyable and academic place to go whereas they’re working.

Amanda Barroso: These tax credit and employer-sponsored FSAs are solely a chunk of the puzzle. What’s subsequent? What about public help applications?

Alieza Durana: First, you should definitely examine sources on the state degree, as a result of each state has a toddler care help company, and lots of states expanded their eligibility standards in the course of the pandemic.

Amanda Barroso: One other nice useful resource is Youngster Care Conscious of America. Whenever you go to their web site, childcareaware.org, you possibly can hyperlink up along with your native baby care and useful resource referral company.

They even provide a helpful dandy guidelines of issues to ask when taking a tour of a kid care middle, an in-home care middle or perhaps a preschool.

And that is one thing I truly used once I was searching for baby care again in D.C., as a result of it was my first baby, and I had no concept what sorts of inquiries to ask or what I needs to be searching for. And this was an incredible useful resource.

There’s additionally a piece on their web site the place you possibly can be taught extra about baby care rules; simply to make it possible for the supplier you are contemplating is compliant.

Alieza Durana: Additionally they present a map outlining essential baby care sources by state. It is a actually wonderful useful resource and an ideal first place to start out for those who’re feeling overwhelmed and unsure.

Amanda Barroso: So how does FMLA match into this?

Alieza Durana: The Household and Medical Go away Act, or FMLA offers 12 weeks of job-protected unpaid time without work for private medical go away, like having a child, or household caregiving go away or new-parent bonding. Mother and father can take it proper after the delivery of a kid or inside the first 12 months of a kid’s life.

There are just a few essential caveats although, however the largest is that to qualify, you need to have been at your job for a 12 months.

So I work at NerdWallet. I am primarily based in Utah, however I have been at my job for lower than a 12 months. So if NerdWallet did not provide paid go away, I, for instance, would not qualify for FMLA.

This makes it particularly laborious for part-time, contingent and low-income employees to entry the profit. Solely 56% of U.S. employees are eligible for FMLA, however as you possibly can think about, it is laborious for a lot of U.S. households to take unpaid time without work.

Amanda Barroso: OK, so you’ve got laid this out. For those who’re fortunate, you get unpaid go away that protects your job for 3 months.

When my daughter was born, I needed to scrape collectively all my trip and sick days and cobbled collectively this three-month parental go away plan, as a result of I did not qualify for FMLA. I hadn’t been at that job for a 12 months.

However my husband had it even worse. He lately began a job with the federal authorities — with the federal authorities no much less — and hadn’t accrued a lot time without work in any respect.

So between my induction and C-section, I spent like every week within the hospital, which he took off unpaid. He stayed dwelling with us for every week, mainly burning up all his time without work. After which he went again to work. So we had little or no time collectively as a household of three.

Now, after all the federal authorities provides workers 12 weeks of paid go away, which can be a complete game-changer if we resolve to have one other child. However the earlier coverage was actually robust on us as a household.

OK, so we have lined some sources on the federal degree, due to Sabrina. We have checked out state-level sources.

However I do assume we might be remiss if we did not provide some primary budgeting recommendation to see if we may help dad and mom get some further respiratory room.

Alieza Durana: So let’s simply be clear. There is no quantity of budgeting ideas or tips that may make baby care reasonably priced for a lot of households. In actual fact, practically the entire dad and mom we might heard from appear to have deal with on their budgets, they usually’ve taken on aspect hustles to get extra cash or minimize out private spending altogether.

Amanda Barroso: Yeah, I’ve completely been there earlier than. And I understand how difficult it may be in your psychological well being to be working lengthy hours simply to barely make ends meet.

However I believe the takeaway right here is being aware of your funds and the place your cash’s going every month may help you establish spending patterns you would possibly wish to change.

A funds is sort of a residing doc and it must be modified and adapt primarily based on the season of life that you simply’re in. So it is value circling again and reassessing your spending.

Alieza Durana: With that in thoughts, let’s discuss to NerdWallet private finance professional, Kim Palmer, to see what sorts of budgeting recommendation she might need for folks.

Kim has been protecting private finance matters for greater than 15 years. And her newest guide is about mothers and budgeting. So I believe she’s going to be an ideal useful resource.

Amanda Barroso: Thanks for becoming a member of us, Kim. Let’s discuss budgeting in an actual normal sense. Lots of the dad and mom, as Alieza mentioned, that we have heard from appear to be watching their budgets carefully — like each greenback has a objective. However are there any ideas or recommendation that is likely to be useful to them as they revisit and rethink issues this 12 months?

Kim Palmer: It may be actually laborious to alter your prices which can be the identical each month. So issues like your hire or housing, utilities, transportation, for those who’re making debt funds — all of these issues are actually laborious to alter.

However you even have variable prices that you simply pay every month. So issues like your meals, clothes, child-related purchases like toys — all of these variable bills are simpler to alter, as a result of they fluctuate.

And so for those who can actually give attention to drilling into these and attempting to chop again there, it will probably make it simpler to shift your funds.

And probably the greatest methods to try this is to actually plug into your native dad or mum community, as a result of you possibly can usually decide up loads of the kid-related objects totally free, as a result of children develop so quick, and sometimes your neighbors, they may not want that bag of garments anymore or the crib or highchair. And you may decide it up totally free, and that may actually provide help to get monetary savings.

Alieza Durana: Is there a suggestion round how a lot of their take-home pay households needs to be capping their baby care spending?

I do know that many finance consultants counsel folks spend not more than 30% of their earnings on housing, for instance. Is there one thing like that for baby care?

Kim Palmer: There’s not a suggestion, and I believe there is a actually good purpose why there’s not. Initially, baby care prices actually range a lot by location. And for those who reside in a giant metropolis, for instance, then your price might be double or much more than double what another person pays in one other a part of the nation.

And the actual fact is: In some circumstances, you may be paying greater than your take-home pay simply to get via these actually costly toddler years. And if you may get via it and maintain onto your job, you will truly be in a greater place in spite of everything of these laborious baby care years are over, since you’ll have been incomes cash that complete time, and you will proceed to earn cash.

Then again, for those who go away the job market, you are sacrificing — not simply the cash you earn at present — but additionally probably your long-term earnings as effectively.

So I believe that is why there’s actually not a easy calculation for a way you make that selection, as a result of there are such a lot of elements concerned. And it implies that it is actually not nearly crunching the numbers, nevertheless it’s additionally about actually reflecting on what makes probably the most sense for you and for your loved ones.

Amanda Barroso: Your level about spending greater than your take-home pay on baby care is a crucial one, I believe.

Anecdotally not less than, I’ve heard tales the place moms particularly drop out of the workforce as a result of baby care prices are equal to or much more than their take-home pay. And it simply looks as if the logical factor to do whenever you’re in that second.

However are you able to stroll us via why dad and mom ought to give this resolution some extra thought?

Kim Palmer: I believe when you’re calculating these baby care selections for your self and for your loved ones, you actually cannot simply take a look at your present annual funds or your month-to-month funds, as a result of the alternatives that you simply make at present actually affect your future incomes potential as effectively.

And I believe it is very easy to make the error of claiming, “Oh, all my take-home pay goes in direction of baby care, so I ought to cease working.” However it’s truly a lot extra difficult than that, as a result of the selection that you simply make additionally impacts that future incomes potential that you’ve got. And I believe that is what makes this so completely different in comparison with different budgeting selections.

Alieza Durana: Thanks for serving to us take into consideration how these monetary selections can affect dad and mom in the long term. Whereas not all dad and mom are going to have the ability to preserve working, simply to pay for baby care, I believe a few of these long-term issues do not get sufficient consideration. They usually can have a big effect on dad and mom’ monetary futures, particularly on the subject of saving sufficient for retirement.

Amanda, have you ever made any tweaks to your funds since including baby care?

Amanda Barroso: Completely. The largest factor is fairly drastic, truly. We moved from Washington, D.C., to the Atlanta space to get baby care assist from my dad and mom. My dad and mom are retired.

And I understand now saying this, it isn’t one thing that’s accessible to anybody — to only decide up and transfer, to have a distant job like I do provides me the flexibleness to try this. And it is completely a privilege.

It has been an enormous assist in the funds, although. Within the fall, we do plan to ship our daughter to a half-day preschool program that — simply maintain your breath right here — it is solely $200 a month. We had been paying $1,360 for full-time toddler care.

This can be a half-day state of affairs, however this type of half-day preschool program was one thing that did not even exist within the Northern Virginia space the place we had been residing. So we’re undoubtedly going to make the most of that.

And we’re truly going to make use of my husband’s FSA program to pay for that. The opposite smaller factor that we have achieved currently is assessment our family subscriptions. More often than not, these sneak up on me.

They auto-renew with out me even actually realizing it till I take a look at my bank card assertion. I am like, “This appears actually excessive.” And naturally, all three of them hit the identical month or one thing, and my funds simply will get busted.

So lately, one of many issues that we checked out was our Sirius XM subscription on our automobile. My husband and I each work remotely now. And we do not have the lengthy commutes that we used to. So we had been like, ” what? Let’s simply cancel it.”

I am not wealthy now, by any stretch of the creativeness — it is like $160 a 12 months. Youngster care will not be abruptly reasonably priced, nevertheless it did really feel actually good to create slightly little bit of wiggle room in our funds. And we may now redirect that cash towards a few of our different financial savings objectives.

Alieza Durana: We have now lined loads of floor at present and labored our means from federal tax insurance policies to state-level sources to private finance ideas.

Amanda Barroso: Properly, that is all we’ve for this episode. I hope that we have helped make clear a few of the federal and employer advantages that may really feel actually overwhelming to folks.

Our objective is to make clear life’s monetary selections and assist folks make them with extra confidence.

In case you have questions on managing the price of baby care, attain us on the Nerd hotline by calling 901-730-6373. That is 901-730-NERD. Or electronic mail [email protected]

Alieza Durana: Additionally, go to nerdwallet.com/podcast for more information on this episode. And bear in mind to comply with, fee and assessment us wherever you are getting this podcast.

And here is our temporary disclaimer, thoughtfully crafted by NerdWallet’s authorized workforce: Your questions are answered by educated and gifted finance writers, however we’re not monetary or funding advisors. This Nerdy information is offered for normal academic and leisure functions and will not apply to your particular circumstances.