What can you actually do to reduce the costs of raising a kid?
The bad news: The US provides very little financial support to parents. We're one of 6 (out of 195!) countries in the world without national paid leave. There's the child tax credit, but you may have started to phase out of that benefit (e.g., if you're earning $150,000+ in household income and filing taxes as a married couple).
The good news: There ARE multiple under-utilized tax planning strategies and work perks out there to help parents reduce the cost of raising kids. They're just buried in arcane tax law and dry employee benefits documents. We break down our top 5 this week:
(1) The Dependent Care FSA: Tax break for working parents
(2) The 529: Tax break for college-saving parents
(3) Back-Up Childcare Benefits: Work perk for childcare emergencies
(4) Group Legal Benefits - Work perk to reduce the cost of estate planning
(5) Infertility and Adoption Assistance - Work perk for parents hoping to add a child to their family
Table of contents
1) Dependent Care Flexible Savings Account: A Tax-break for working parents
What this is: This is a government tax incentive for working parents, and it can lead to serious tax savings. It offers you an upfront tax deduction (i.e., save ~20-40%, depending on your marginal state and federal tax rate) on expenses like pre-school, summer day camps, before/after school programs, a nanny, or daycare, up to $5K per household in 2022 ($5K for married couples filing jointly or $2,500 for each spouse filing separately). For context, as of 2021 ~60% of Americans with kids are spending more than $10,000 per year on kids, and in most states the cost of childcare is even higher than the cost of college each year. So yes, this tax break is clearly ripe for an update (it's at the same $ amount as it was back in 1986 when it was introduced! If it had merely kept pace with inflation—it should be at $12,500 in covered expenses today!). But gripes on policy aside, let's make sure you and your family can take advantage of the savings that ARE on the table.
What's the benefit: Savings of up to ~$1,850 each year. Contributing to a Dependent Care FSA lowers your taxable income, and that decreases your tax burden—so you owe less to Uncle Sam come tax time. This is the US government's thank you for being a working parent who is caring for either (a) a child under 13 or (b) other eligible loved ones who aren't physically or mentally able to take care of themselves (e.g., a disabled spouse, an elderly parent who is your dependent). Curious about the exact savings number for you? Steward can help you calculate your personalized savings based on your unique financial situation—you can join our early access community here.
Strings attached: Largely hassle-factor! It takes ~2 hours of effort to get this set up and file paperwork. Given the potential of ~$1,850 in tax savings for 2 hours of effort (= $900+ / hour!), this effort might be well worth it for you, but you know your $/time trade-off best. Two things to keep in mind: (1) You'll need to save receipts for the IRS (2) These are "Use it Or Lose It"—which means, you'll lose any funds remaining in your account when the plan year ends or if you change employers. Your employer might offer you a 2.5 month grace period or up to $500 to be rolled over to next year's plan.
How to use it: (1) Determine if you're eligible. Check if your employer offers a Dependent Care Flexible Savings Account (FSA)—about 40% of employers do—and what's the upper limit you can contribute. Figure out if you have eligible expenses. What's included: after-school programs, above-board nannies or au pairs, nursery school or pre-school, summer day camp. What's excluded: tutors, music lessons, language classes, kindergarten, non-work related babysitting, or sleep-away camp. See a full list from the IRS here (The IRS has not updated it for 2022 taxes yet.) (2) Register during open enrollment. (3) Submit your receipts. (4) Get reimbursed!
Curious for more details? We've included our ultimate guide to the DC FSA here.
(2) The 529: Tax-break for college-saving parents
What this is: The 529 is a college savings plan that helps you start saving for future education expenses today, with major tax perks. Its can be used to pay for tuition at expenses at any qualified college, trade school, or for up to $10,000 per year at a K-12 school.
What's the benefit: Savings of about 20%+ on the total cost of college—which could add up to ~$200,000 in savings. How? For any money you invest in a 529, you won't pay taxes on the growth, and when you withdraw the money you won't pay taxes on that either. This can go a long way in helping you avoid the $1.7 trillion in student loan debt that has become a multi-generational crisis in the U.S. You can set aside money for anyone you want—including yourself. It's easy to change the beneficiaries at any time.
What are the strings attached?: You'll need to use the money towards educational expenses.
How to Use it: Check to see if your employer offers parents matching contributions to a 529 college savings plan, or request that they start offering a payroll deduction along with an employer match to 529 plans as a financial wellness benefit! Research from ISS Market Intelligence, shows that those who save for college by contributing to 529 plans through payroll deductions save 75 percent more than those who make automatic payments through bank accounts.
(3) Back-Up Childcare Benefits: Job perk for childcare emergencies
What this is: Your employer covers the costs or part of the costs of back-up childcare, when your regular childcare plans fall through. During the first three months of the pandemic, usage of backup care was about 20 times higher than pre-pandemic levels, according to Maribeth Bearfield, chief Human Resources officer at Bright Horizons. And it's continued to increase throughout COVID.
What's the benefit: This one can be worth it not just for the savings, but also for the "peace of mind" in helping ease your search for back-up care.
Strings attached: You may be limited to the back-up options offered by your work. Common providers are Care@Work or Bright Horizons Family Solutions (clients include: GM, Amazon, Apple, Facebook, etc.).
How to use it: Check in with your employer's HR on what benefits are on the table and how to use them.
(4) Group Legal Benefits - A Job Perk to reduce the cost of estate planning
What this is: Many large employers offer a group legal plan as part of their benefits package, which includes a basic will and trust. You may be asking: “Why do you need an estate plan so early? I don't have an estate...and I'm not planning on my life ending anytime soon!” Estate planning is terribly named by the financial industry. It's not only for the ultra-wealthy. It would be better named a "god forbid" plan—your chance to weigh in on how you'd like your finances and health to be treated in a worst case scenario. I suggest this as a must-do for parents since it ensures that you can name a guardian for your child and that the decision doesn't get debated in court.
What's the benefit: ~$1,800-$4,800 in legal fees saved. The typical cost of a group legal plan is $200/year, and you can opt-in just for the year you set up your basic estate planning documents. Getting these set up through a lawyer yourself and directly would typically cost $2-5K in legal fees.
Strings attached: This benefit makes the most sense if you have simple estate planning needs. What counts as complex? If you have a trickier situation (divorce, inherited assets, property in multiple states, extra planning strategies in play to avoid estate tax —currently triggered at $11.9M+ in net worth), it might be worth going more bespoke and footing the $2000-5000 vs. $200 bill.
How to use it: You can sign up during open enrollment in October or November, during the following year. Typically the plan will have a directory of lawyers, which you can search by subject area, and then further hone in on whom to choose with Yelp reviews.
(5) Infertility and Adoption Assistance - Job Perk for parents hoping to add a child to their family
What this is: A company benefit for (a) fertility treatments (more common) or (b) assistance with adoption costs (less common, but luckily also getting offered more lately!). This is a space that's rapidly changing. As recently as a decade ago, less than 1/4 of major employer plans covered IVF, but now that's getting closer to 40%. If you don't have coverage, it's worth it to put in some leg work to see if your company would be willing to add coverage. It could be as simple as a letter to HR (because) you and everyone experiencing infertility at your company, today and into the future, could benefit from you asking for coverage.
What's the benefit: One in eight couples suffers from infertility in the United States, according to the US Centers for Disease Control and Prevention. Fertility treatments like egg freezing and IVF are costly—a round of IVF can cost upwards of $12,000—not including medication, according to a University of Iowa study cited by the National Conference of State Legislatures. Most employers place some type of limit on infertility treatment coverage, via a lifetime maximum dollar benefit (e.g., $16,250; used by ~60% of employers) or a limit on the number of IVF cycles (e.g., 3 cycles; used by another ~10% of employers). The chart below shows a deep-dive on different types of fertility benefits covered by large employers, to help you see what might be on the table at your employer.
How to use it: If your employer offers a health plan, look into whether they cover fertility treatments or allow you to pay for them through your FSA or HSA accounts, and similarly if they offer any coverage for adoption benefits.
Interested to find other ways to save on taxes and grow your money as a parent?
Steward ‘s mission is opening up the 1%’s wealth strategies to America’s up-and-coming families with a combination of 21st century tech and trusted advisors. We help families determine how, where, and when to invest and save on taxes in plain-English, with minimal time and effort. Steward can personalize your recommendations based on your specific picture—whether that's planning for kids, kids on the way, or kids you've already had. You can sign up for our early access community here.