My wife and I haven’t argued this much in a long time. You’d think that my wife going back to full time work – and making more money – would only be a good thing, but it has brought about a lot of stress. It’s more proof that money isn’t the only thing that matters. Time matters. Passion also means something. Professional fulfillment has a place, too. For all of these reasons and more, I’ve fully supported and empowered my wife going back. That said, child care expenses are hella-expensive. Today we will discuss two ways to ease the pain a bit: the flexible spending account and 2018 child tax credit changes.
Given that part of this blog has always been about following my family’s journey to financial independence, it seems that this post is warranted. Also, one of the most common comments/questions I get when I discuss our financial independence journey is “That’s wonderful that you guys are accomplishing your financial goals, but do you have kids?”
I am pretty sure I won’t be the only one who can relate to this topic: balancing family, money, and time.
The struggle is real.
Mrs. TPP (my wife) has debated going back to full-time work as an educator for the past year or so. She never really left work completely, though. For about five or six years she has worked part time in some capacity, averaging about 20 hours of work each week.
However, she always had the itch to go back to full time work. And for good reason. My wife is a better teacher than I am a doctor – and I am no slouch at my job. She is simply a gifted educator. In every sense of the word, education is her calling.
Who am I to stop that?
Outside of trying to be a decent husband, her exceptional ability at teaching – and being the best mom I know – has always made it easy for me to empower her to do what she finds fulfilling. I’ve always supported her goals. Whether she wanted to stay home full-time and rule the roost, or to work full-time and change the world with her gifts, I promised to always support her.
The dilemma came when the job she started lining up wasn’t a typical “teacher job” that fits neatly into a 10 month schedule. It’s a 12 month job. While it pays more, it also comes with particular problems we had to trouble shoot.
In particular, the dilemma has revolved around two important topics: finding child care and paying for it. Let’s discuss the problem and then two possible solutions.
Children are Expensive
The other day I was working with a resident who is newly pregnant and planning to have a kid at the beginning of next year. As I was talking about my family’s current situation and the anticipated increase in the cost of childcare, I could tell she was concerned about her own situation with a new baby on the way.
I mentioned that the hospital day care where we work charged $1800 per month for two kids. Given that my wife works in education, this $1800 monthly cost was going to eat up pretty much every dime of her take home pay.
In my resident’s situation, it was going to be around $900 ($10,800 per year). This is a substantial cost when you are making $55,000 per year. It’s 20% of her income!
Fortunately, there are a couple of ways to make this a little less painful to the bank account.
Dependent Flexible Spending Care Account
Our hospital – and many others – have a dependent flexible spending care account (DFSCA). We use $5000 pre-tax to fund this account and then submit paperwork to have the money reimbursed post-tax.
Given that our income places us solidly into the 32% bracket, this matters. That means I get to keep 68% of my income post-tax. This $5,000 post-tax reimbursement is really like getting $7,353 pre-tax to use on child care ($7,353 x 68% = $5,000 post-tax reimbursement).
As I explained this benefit to the resident I mentioned above, I could immediately see the stress release. The burden was lifted just a little. Now, she is in a different tax bracket, but the same principle still applies (she will get to use $5,682 of her pre-tax dollars to pay post-tax childcare expenses).
Important Note: These flexible spending accounts must be opened during “open enrollment” which is usually in the fall for most people. At my hospital it is in November, for example. Please, plan accordingly.
Child Tax Credit
The second way to ease the pain of rearing children is through the child tax credit. Before the recent tax changes in 2018, most high-income earners were not able to take advantage of this credit.
However, with the new Tax Cuts and Jobs Act this is no longer the case. Here is how the new credit works:
- $2,000 per qualifying child (<18 years old)
- The phase-out for the tax credit starts at $200,000 for single filers and $400,000 for those filing joint returns while married
The important distinction here is that this is a tax credit and not a tax deduction. The difference is that a tax credit lessens your annual tax dollar for dollar. If you owed $50,000 in tax prior to the credit, you’ll know owe $2,000 less per child ($48,000 for one kid; $46,000 for two; etc).
If it were a tax deduction, it would simply lower your taxable income, which may not help much now that the standard deductions are $12,000 (single) and $24,000 (married). Many who itemized deductions before will now be using the standard deductions.
So, taking my family’s situation into consideration, we have three kids ($2,000 x 3) and so we get a $6,000 tax credit. Pretty sweet deal.
For my resident mentioned above, this will bring home an extra $2,000 to her house.
Combining the two benefits
Combining the two two tax-efficient techniques to pay for childcare, we can start to see some real benefit. Let’s see how it shakes out for both my family and my resident.
For my family’s situation paying $1800 per month ($21,600 annually) in child care, here is how it shakes out. We get to cover that $21,600 with $7,353 pre-tax dollars via the flexible spending account and receive $6,000 in child tax credit. This reduces our overall expected cost to $8,247 annually – or $687 per month.
That’s actually a really good deal for childcare for two kids! But what about my resident?
Well, in her situation, we anticipate her monthly cost at $900, or $10,800 annually. She will get to use her pre-tax flexible spending account for a post-tax benefit of $5,682 and her new child tax credit of $2,000. Thus, her annual expenses are now lessened to $3,120, and her monthly payment is now $260. This is not quite the burden that $900 seemed!
Sometimes all we need in life is to know all of our options. The outlook can look bleak at times, but we must make sure we are using all of the resources we have available to us.
If you are in the process of planning a pregnancy, currently pregnant and worrying about the expenses, or you feel like you are being swallowed by childcare costs… I hope this information can be helpful to you!
Do you guys have any tips on saving for childcare expenses? Is a flexible spending account offered by your employer? Do you use it? Leave a comment below.