Your little miracle is on the way or arrived. The next step is deciding what to do in caring for them once they are here. There are so many decisions to make. Keep working or stay home; daycare or nanny; family to help or not; and these are just some of the decisions.
I by no means have all the answers, but I can say each and every situation is unique, and it is most often a blend of many different things to make it work for a family. As your child ages the needs will change. My advice is to be flexible, trust your gut instincts and do whatever works best for your situation.
What options are even available to blend together you might be asking. We will get into it because I can promise I have explored it all for either my own needs or the needs of my clients.
The Childcare Expense
It is estimated that in the United States for the first five years of child’s life in full time care a family can expect to pay an average of $70,000 to $110,000. With full-time infant care being the most expensive, ranging from $16,000 to $24,000 a year.
The U.S. Department of Health and Human Services considers childcare affordable if it costs no more than 7% of a family’s income, a standard that most American families find challenging to meet. For comparison it is recommended that your mortgage payment be no more than 28% of your monthly income. Meaning affordable childcare is considered to be a quarter of your mortgage.
While affordable childcare has been on political platforms on how to best support parents afford care and good care to be provided, I am here to discuss the current realities to help you decide as to what works best for your family.
The most expensive childcare in the US
These are figures according to the United State Census Bureau
1. Washington, D.C. - Washington, D.C. leads with the highest average cost, with infant care in a licensed center costing about $25,480 annually.
2. Massachusetts - In Massachusetts, the cost of infant care averages $24,005 per year.
3. Hawaii - Hawaii ranks third, where families can expect to pay around $22,585 annually for infant care in licensed centers.
4. Washington - In Washington state, the average annual cost for infant care is approximately $20,370.
5. Minnesota - In Minnesota, infant care costs an average of $20,129 per year.
Colorado comes in at about $19,000 annually for full-time infant care in a licensed center.
Alternative to Daycare Centers
A licensed center is convenient because if someone gets sick they do not close. They often come with curriculums and convenience of food. The cost as seen above is steep and for some a daycare center is not what they feel is best. Here are some other ways to take look at childcare:
Nanny
A private nanny comes in at the most expensive childcare option. The national average is $22.50 an hour, for 40 hours of care, that is $900 a week and $45,000 a year for 50 weeks of work. The hourly cost will vary around the country and align more with the cost of living. For example Colorado has an average of $25 an hour. The benefits of a person coming to your home and keeping your child in their own environment is why some people use this route. A good nanny will typically become part of your family and earn a higher level of trust.
Payroll taxes are a consideration in hiring a private employee and some families will offer additional benefits of health insurance and mileage reimbursement to entice the best candidates. Sometimes the position is also a live in position as well.
Nanny Share
This is a concept of cost splitting between 1 to 3 families. One nanny taking care of kids from multiple families.
Taking the about cost considerations a family can expect to pay $450 a week and $22,500 a year on average. If you feel more comfortable with a nanny route this could be a more cost-effective way to do it. There are considerations of where the care will take place and can be less convenient if you have to travel to where the nanny will be.
Au Pair
This is a cultural exchange program where young adults from around the world are hosted by an American family and in return provide childcare support while also bettering their English speaking. Typically, a 12-month arrangement. This is a rich program to expose yourself and children to another culture in your own home.
Au pairs live in your home with you and can provide up to 45 hours a week of care, with a minimum weekly stipend of $195.75, a $500 stipend toward English educational classes. There is a cost to the agency of between $8,000-$10,000 in helping with the visa, training and support in the process. All in your can expect to pay around $19,000 for just the childcare component of the au pair program.
You will need to provide a car for them to drive, get them a drivers license and the training involved, car insurance, provide food and the additional cost of utilities with someone living in your home.
In Home Daycare
While you should look for someone licensed by the state, an in-home daycare option can be more inexpensive. The average cost for home daycare ranges from $6,500- $12,000. If someone is watching more than 4 children, they are required to be licensed. These are typically in someone’s own home which is why it can be less expensive given there is no additional overhead of a space.
Make sure to check references, understand how they care for the children and if you are allowed to drop by any time.
Family
The cheapest option will be to lean on your village of siblings or parents. Most would provide care for free, however, it can cause issues when there is a difference of how things are done. Make sure you are comfortable with the family dynamics in choosing this option
Federal Tax Credits and Benefits
There are tax credits and savings available to help offset the cost of childcare
Dependent Care FSA
Your employer may offer a dependent care financial savings account. This account allows you to save up to $5,000 pre tax and use it to pay for childcare expenses. When used for childcare there is no tax implications on the way out. There is a decrease in taxable income, pre-tax savings and no tax on the way out. It has to be used before the end of the year. Unfortunately, as seen this only partially covers the cost of care in most places.
Child and Dependent Care Tax Credit
A tax credit that reduces federal income tax owed directly, for children under age 13. Maximum credit is $1,050 for 1 child and $2,100 for more than 2 children based on maximum expenses of $3,000 for 1 child and $6,000 for more than 2 children.
The use of the credit percentage is based on income and for anyone making over $43,000 only 20% of the credit is available.
Child tax Credit
Unlike the dependent care credit this is based on just having children that are under the age of 17, however like the previous credit it is a reduction of income tax owed.
This credit is up to $2,000 per child and refundable credit up to $1,600. There is a phase of use of this credit that begins at $400,000 for joint income and $200,000 for all other filers.
Final Thoughts
The childcare decision is complex, and each family has different needs. It is also expensive. I hope laying out these options will be helpful in making your own choices. Know it will likely be a blend of a lot of the above. Lean on those who have come before you, those who are in it with you and professionals like myself who are happy to help you figure out what is best for your family.
Congratulations on your little one.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and there is no guarantee of future results. All indices are unmanaged and may not be invested directly. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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