Raising a kid is expensive. Really expensive. According to a United States Department of Agriculture study published in 2017, it would cost an average of $233,610 to raise a child born into a middle-income family in 2015 through age 17. That’s a lot of money.
A 2016 Time Money article states that “…the average cost for a week at a child care center, for one child, totaled $196” which equates to $10,192 per year. The average isn’t quite as high in Indiana but is still very expensive at $8,918 or $743 per month. A study published in 2016 by the Economic Policy Institute found that the average annual cost of childcare was more expensive than public, in-state college tuition in 23 states.
One way that some families may be able to mitigate a portion of the cost of child care is by utilizing the Dependent Care Flexible Spending Account (FSA) benefit through their employer. Obviously, this is only applicable if your employer offers this benefit but a lot of people who have it available to them don’t utilize it because they’re not sure what it is.
The Dependent Care FSA allows you to contribute $5,000 pre-tax (unless you’re married and filing separately) that can be used to pay for eligible dependent care services such as day care, preschool, and before or after school programs. Considering that the average annual cost of child care in Indiana is $8,918, this is a no-brainer, if it’s available to you.
Making the maximum contribution to the account will decrease your income tax liability on money that you are already paying towards dependent care services.
How do you get the benefit from it?
- Set up your contribution to the account through payroll ($5,000 divided by 26 pays = $192.31 per pay).
- Pay for child care costs out of pocket.
- Apply for reimbursement once you have paid $5,000 of child care expenses (that would be by July using the IN average of $743 per month). You can apply for reimbursement on a monthly basis, but it’s easier to only have to apply once, if you can front the cash. Some employers will allow you to apply for reimbursement before you have fully funded the account because they know that they will receive the rest of the money through your payroll through the rest of the year.
By implementing this strategy, not only have you paid for the child care costs that you would be paying for anyways, but you’ve also saved some tax that you would have otherwise had to pay.
