Smart Money Podcast: Nerdy Deep Dive: How to Reduce Child Care Costs

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.

This week’s episode is a Nerdy deep dive into the cost of child care.

Check out this episode on either of these platforms:

• Apple Podcasts

• Spotify

Our take

In this two-part Nerdy deep dive, we go behind the scenes to untangle one of the largest budget items for many families: child care costs.

In Part 1, we spoke with child care reporters and policy experts to better understand what’s broken in the current U.S. child care system and why costs are so high for parents. We also heard from listeners across the U.S. who shared their child care stories and how exorbitant costs have negatively impacted their budgets.

In Part 2, we highlight financial resources for parents at the federal and state levels: the child tax credit, child and dependent care credit, and earned income tax credit (EITC). We also explain federal protections, like FMLA, and employer-sponsored benefits, like dependent-care FSAs and paid leave.

Some of these programs require parents to pay upfront and get reimbursed, which can be a challenge. Other benefits allow parents to take money out of their salaries pre-tax to help offset costs.

We also discuss personal finance tips for parents looking to make changes to their budgets. Keeping tabs on variable costs — expenses that change month-to-month — can help you identify potential places to cut costs.

Parents should also think about their long-term financial security and goals before deciding to drop out of the workforce to take on caregiving full time, even if one parent’s salary is going primarily toward child care costs.

Finally, we speak directly to parents who are grappling with how to pay for child care costs. The bottom line: It’s not your fault, and don’t be afraid to use your voice.

More on tax credits for parents from NerdWallet:

• Child Tax Credit: What It Is and How to Claim It in 2022

• Earned Income Tax Credit (EITC): What It Is & How to Qualify

• Rules and Qualifications for Claiming a Tax Dependent

Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.

Episode transcript

Sean Pyles: Welcome to the NerdWallet Smart Money Podcast. I'm Sean Pyles.

This is Part 2 of our Nerdy deep dive into the cost of child care. In this episode, Amanda Barroso and Alieza Durana explore the personal finance and tax strategies to pay for child care. Welcome back to the podcast, you guys.

Alieza Durana: Hey there, Sean. Thanks for the warm welcome.

Amanda Barroso: Hey Sean.

Sean Pyles: So in the first episode of the series, we talked about the various factors that make child care expensive, difficult to find or competitive to get into for parents. And listeners, if you've not checked that out yet, I highly recommend that you do so.

And Amanda and Alieza, what do you have in store for us this episode?

Amanda Barroso: In this episode, we're going to talk with two of our very own Nerds to learn more about tax breaks and employer benefits that we think parents should be aware of, along with some other strategies that might help parents consider their budgets in the long term. We also speak to an early childhood education advocate, Mai Miksic, from Pennsylvania.

Alieza Durana: You're going to hear her expertise woven throughout this episode, alongside some Nerdy experts of our own. Today, we're drafting tax Nerd Sabrina Parys to help us decipher potential tax benefits.

We'll be discussing four main policies: the child tax credit, the child and dependent care credit, the earned income tax credit, and employer-sponsored dependent-care FSA programs. Whoa, what a mouthful.

Amanda Barroso: Yes, very much so. And one quick note before we move forward and learn about all of these is that we're not financial or tax advisors, and this info is for general educational purposes.

Now that we've got that out of the way, let's welcome tax Nerd Sabrina.

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

Amanda Barroso: We're so happy to have you here to help break down some of this complicated and complex tax stuff for us.

So to get started, tell me about the child tax credit. What is it, who can access it, and how much of a dent can it make?

Sabrina Parys: The child tax credit was first introduced way back in 1997 as part of the Tax Payer Relief Act. And the intention behind it, much like the name implies, was to provide some sort of financial relief to folks with kids.

So if you've got qualifying dependents and you meet certain income qualifications, you can claim the credit when you file your taxes.

An important thing to note about the credit, though, is that it's partially refundable. That means it can potentially lower your tax bill to zero if you owe taxes. And if you don't, or if it does cut your bill down a little bit, it's possible that we get a portion of it back, not the full thing, as a refund.

Alieza Durana: How much can people get, and who qualifies?

Sabrina Parys: So the exact credit amount can fluctuate year to year based on things like legislation or inflation. But folks who claim it would get a credit of up to $2,000 per dependent under the age of 17, and some of that $2,000 would be potentially refundable.

Now the exact amount of credit that folks will get will ultimately depend on a number of other factors, including income.

And most importantly, you need to have what the IRS calls a “qualifying child.” The silver lining here though, is that a qualifying child is defined pretty broadly in the eyes of the IRS. That means a qualifying child can be a biological child, a stepchild, a foster child, a grandchild, even a niece or nephew.

You just have to make sure that you are rightfully claiming them on your tax return as a dependent. Another nice little detail is that families who generally don't file taxes due to their lower income status can file a simple tax return in order to claim the credit and potentially get some of it refunded.

Alieza Durana: What changed in 2021?

Sabrina Parys: A lot. So the American Rescue Plan Act — that big relief package that was passed back in March of 2021 — changed quite a few things about the child tax credit.

It expanded the tax credit to a max of $3,600 per qualifying dependent. The tax credit became fully refundable.

And for the first time in U.S. history, half of that credit was also sent out to folks in the form of advanced payments. The advanced payments made it so that folks got monthly installments of up to $300 per child from July through December of 2021 as an advance, so they could immediately use that money.

Normally, when you apply for a tax credit, you have to wait until you file taxes in April, and then you'll get anything potentially refunded back to you. So the impacts of those advanced payments were huge.

In fact, the Columbia University Center on Poverty and Social Policy estimates that the credit briefly cut child poverty by 30%.

So the bad news here is that unless Congress acts to renew these changes — and it's not looking like there's much movement right now — the tax credit for 2022 will revert back.

Alieza Durana: Next up, we've got the child and dependent care credit. This credit can help cover the cost of things such as day care for certain dependents, like kids under the age of 13 or a spouse or parent who's unable to care for themselves.

What can you tell us about this credit, Sabrina?

Sabrina Parys: This credit is meant to help folks cover the cost of out-of-pocket expenses that they made throughout the year for certain types of care provided to qualifying a child under the age of 13.

And the kind of care that's considered a qualifying expense can include day care centers, after-school programs, child sitters, nursery school, preschool and even care provided by a relative.

But you can't claim that relative as a dependent. So, for example, if your 15-year-old is watching your five-year-old, that doesn't count as a qualifying expense. If you're interested in all of the nitty-gritty details, IRS Publication 503 has the full details

And as with all credits though, there's a ton of fine print. So, for example, you generally have to earn some income throughout the year to qualify. And if you share custody of your child, you may need to approach applying for the credit a little bit differently. So make sure to check out the IRS website for the full details.

Alieza Durana: That's great to know, Sabrina. How much is the credit?

Sabrina Parys: So prior to 2021, you could receive up to $1,050 for one qualifying person and up to $2,100 for two or more qualifying people, and it was non-refundable.

In 2021, the American Rescue Plan made that credit accessible to a much wider range of folks. The credit became potentially refundable. It increased to a max of $4,000 for one dependent or $8,000 for two or more.

Unfortunately, if there's no movement from the government to renew these enhancements, then that credit for 2022 will revert back to its original iteration.

Alieza Durana: Next, we're going to talk about the earned income tax credit. It's not a child care-specific credit, but it can, in theory, help low- and moderate-income families get a refund that can be used for the cost of running a household, including child care.

Sabrina Parys: The earned income tax credit is a refundable tax credit that's meant to help low- and moderate-income families.

So, put plainly, if you make below a certain amount of income each year, you might be able to get some of that money back as either a refund or as a reduction in your tax bill. In 2022, the most you can make to qualify is around $59,000.

Another important thing about this is that you don't necessarily have to have a child in order to claim it, but the amount you qualify for can increase based on the number of kids you have.

There is a lot of that fun, fine print to wade through. For example, you have to meet certain income criteria, your child has to be beneath a certain age. So if you're interested in all the specific details, we have a great breakdown of all of the qualifications on our website.

And the IRS also has this really handy interactive qualifier tool on their website. You can use that to figure out if it's the right credit for you.

And just as a final note: Applying for a lot of these credits usually means a slightly delayed refund. So you'd probably get it around mid-February. Or in this year's case, the IRS was experiencing quite a bit of backlog and delays. A lot of people got their refunds around March 1st.

Amanda Barroso: I'm glad these tax credits exist. And now I know a lot more about them. But I'm wondering if they're really helping most families, just simply based on the massive percentage of their budgets’ child care is taking up.

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

Mai Miksic: Most advocates aren't really proponents of these kinds of tax credits, because they really require families to be able to pay upfront. And for a lot of families, that's just not possible.

So those families usually are able to take advantage of the child care subsidies that the federal and state governments put out for families making less than 200% of the federal poverty line, but it's complex. And tax credits, I just think, are not a long-term solution to the child care crisis.

Amanda Barroso: Being able to front those costs seems to be a real downside to these tax credits. And in the meantime, you have families who don't have that cash in savings.

And they might have to resort to putting those costs on a credit card, which can lead to paying interest while you're waiting for that refund to come in. And like Sabrina, you said, the IRS is not always on time, right?

So there's some uncertainty around when that refund will hit, which can cause a lot of anxiety for families.

So are employers doing anything to help their workers on their end?

Alieza Durana: It depends on your employer, but it's a drop in the bucket. Some employers offer employer-sponsored dependent-care flexible spending accounts, or FSA programs for short.

If your employer offers this benefit, you can contribute your pre-tax income to an account you use to pay for child care. So who does this benefit Sabrina?

Sabrina Parys: Well, this program is usually a little bit more advantageous to folks who, for one, actually have access to them. Not everybody does; not every employer offers it.

So, as you mentioned, FSAs allow you to contribute up to a certain amount of pre-tax funds each year to an account, and those funds can be used to cover qualified child care expenses.

Alieza Durana: For those who do have access, Sabrina, how much can they contribute?

Sabrina Parys: So in 2021, the American Rescue Plan increased the contribution limit to $10,500 for those who are single or married filing jointly, and $5,250 for those who are married filing separately.

As of now, the 2022 amounts have reverted back to the standard amount, which is unfortunately much lower. It's about $5,000 for married filing jointly and single, or $2,500 for those married filing separately. And just like the child and dependent care credit, special rules apply in cases of custody or divorced parents.

So a few other details to mention because there are many aspects to FSAs that can be tricky to navigate.

It's also a use-it-or-lose-it type of situation. So you have to decide how much you're going to contribute during open enrollment, which can be tricky when you're not sure what your situation is going to look like.

And you generally have to use the funds that you put in an FSA in a year's time. If there's anything left over, you lose access to it. Some employers do offer short grace periods, but always check and understand the terms of your plan.

And then the other thing that I also want to mention is that you can take advantage of both the child and dependent care credit, as well as an FSA, but you have to avoid what some people call “double dipping.” That essentially means that you can't get reimbursed for the same expenses that you're going to claim on that credit.

Alieza Durana: So Sabrina, can parents use these employer-sponsored FSAs to cover things like summer camps, too?

I'm thinking about all the parents who are struggling to piece together care for the summer while they're still working full-time, but schools are out of session.

Sabrina Parys: That's a great question. And the good news is that yes, you can use FSA funds for a number of child care related services.

It covers, more or less, the same expenses as the child and dependent care credit. So for qualifying dependents under 13, money that's spent on summer camps, day care expenses, preschool, childsitters, and nursery school expenses — all of those qualify.

Of course, this isn't an exhaustive list, so there are a lot of exceptions. For example, you can't get reimbursed, as I mentioned, for one of your older kids watching a younger one, and you also can't get reimbursed for tuition for kids once they hit kindergarten and above.

So if you want to get an exhaustive list, check out the IRS website.

Amanda Barroso: When I spoke with Mai about using FSA funds to cover summer camp costs, she mentioned that some camps require all the costs upfront, which can amount to a big chunk of change.

Here's what she had to say about her experience paying for summer camp for her daughter this year.

Mai Miksic: I actually used an FSA for that, because I had to pay something like $2,600 upfront for my daughter's summer camp.

I mean, my husband and I both work full-time jobs. We needed something that would give her an enriching, fun summer experience that also would make sure she was safe and occupied during those business hours.

Alieza Durana: It's wild to think that on top of regular child care costs, parents are also having to pay a lot in summer camps, which basically function as child care when school is out.

And while FSAs are one way to help save for these costs, these programs are not offered by every employer. And even then, FSAs only cover a small portion of the total costs many families are paying to make sure their kids have a safe and ideally fun and educational place to go while they're working.

Amanda Barroso: These tax credits and employer-sponsored FSAs are only a piece of the puzzle. What's next? What about public assistance programs?

Alieza Durana: First, be sure to check resources at the state level, because every state has a child care assistance agency, and many states expanded their eligibility criteria during the pandemic.

Amanda Barroso: Another great resource is Child Care Aware of America. When you go to their website, childcareaware.org, you can link up with your local child care and resource referral agency.

They even offer a handy dandy checklist of things to ask when taking a tour of a child care center, an in-home care center or even a preschool.

And this is something I actually used when I was looking for child care back in D.C., because it was my first child, and I had no idea what kinds of questions to ask or what I should be looking for. And this was an amazing resource.

There's also a section on their website where you can learn more about child care regulations; just to make sure that the provider you're considering is compliant.

Alieza Durana: They also provide a map outlining important child care resources by state. It's a really amazing resource and a great first place to start if you're feeling overwhelmed and uncertain.

Amanda Barroso: So how does FMLA fit into this?

Alieza Durana: The Family and Medical Leave Act, or FMLA provides 12 weeks of job-protected unpaid time off for personal medical leave, like having a baby, or family caregiving leave or new-parent bonding. Parents can take it right after the birth of a child or within the first year of a child's life.

There are a few important caveats though, but the biggest is that to qualify, you have to have been at your job for a year.

So I work at NerdWallet. I'm based in Utah, but I've been at my job for less than a year. So if NerdWallet didn't offer paid leave, I, for example, wouldn't qualify for FMLA.

This makes it especially hard for part-time, contingent and low-income workers to access the benefit. Only 56% of U.S. workers are eligible for FMLA, but as you can imagine, it's hard for many U.S. families to take unpaid time off.

Amanda Barroso: OK, so you've laid this out. If you're lucky, you get unpaid leave that protects your job for three months.

When my daughter was born, I had to scrape together all my vacation and sick days and cobbled together this three-month parental leave plan, because I didn't qualify for FMLA. I hadn't been at that job for a year.

But my husband had it even worse. He recently started a job with the federal government — with the federal government no less — and hadn't accrued much time off at all.

So between my induction and C-section, I spent like a week in the hospital, which he took off unpaid. He stayed home with us for a week, basically burning up all his time off. And then he went back to work. So we had very little time together as a family of three.

Now, of course the federal government offers employees 12 weeks of paid leave, which will be a total game-changer if we decide to have another kid. But the previous policy was really tough on us as a family.

OK, so we've covered some resources at the federal level, thanks to Sabrina. We've looked at state-level resources.

But I do think we'd be remiss if we didn't offer some basic budgeting advice to see if we can help parents get some extra breathing room.

Alieza Durana: So let's just be clear. There's no amount of budgeting tips or tricks that will make child care affordable for many families. In fact, nearly all of the parents we'd heard from seem to have a good handle on their budgets, and they've taken on side hustles to get extra money or cut out personal spending altogether.

Amanda Barroso: Yeah, I've totally been there before. And I know how challenging it can be on your mental health to be working long hours just to barely make ends meet.

But I think the takeaway here is being mindful of your budget and where your money's going each month can help you identify spending patterns you might want to change.

A budget is like a living document and it needs to be changed and adapt based on the season of life that you're in. So it's worth circling back and reassessing your spending.

Alieza Durana: With that in mind, let's talk to NerdWallet personal finance expert, Kim Palmer, to see what kinds of budgeting advice she might have for parents.

Kim has been covering personal finance topics for more than 15 years. And her latest book is about moms and budgeting. So I think she's going to be a great resource.

Amanda Barroso: Thanks for joining us, Kim. Let's talk about budgeting in a real general sense. Many of the parents, as Alieza said, that we've heard from seem to be watching their budgets closely — like every dollar has a purpose. But are there any tips or advice that might be helpful to them as they revisit and rethink things this year?

Kim Palmer: It can be really hard to change your costs that are the same every month. So things like your rent or housing, utilities, transportation, if you're making debt payments — all of those things are really hard to change.

But you also have variable costs that you pay each month. So things like your food, clothing, child-related purchases like toys — all of those variable expenses are easier to change, because they fluctuate.

And so if you can really focus on drilling into those and trying to cut back there, it can make it easier to shift your budget.

And one of the best ways to do that is to really plug into your local parent network, because you can often pick up a lot of the kid-related items for free, because kids grow so fast, and often your neighbors, they might not need that bag of clothes anymore or the crib or highchair. And you can pick it up for free, and that can really help you save money.

Alieza Durana: Is there a guideline around how much of their take-home pay families should be capping their child care spending?

I know that many finance experts suggest people spend no more than 30% of their income on housing, for example. Is there something like that for child care?

Kim Palmer: There's not a guideline, and I think there's a really good reason why there's not. First of all, child care costs really vary so much by location. And if you live in a big city, for example, then your cost could be double or even more than double what someone else pays in another part of the country.

And the fact is: In some cases, you will be paying more than your take-home pay just to get through these really expensive toddler years. And if you can get through it and hold onto your job, you'll actually be in a better position after all of those hard child care years are over, because you'll have been earning money that whole time, and you'll continue to earn money.

On the other hand, if you leave the job market, you're sacrificing — not just the money you earn today — but also potentially your long-term earnings as well.

So I think that's why there's really not a simple calculation for how you make that choice, because there are so many factors involved. And it means that it's really not just about crunching the numbers, but it's also about really reflecting on what makes the most sense for you and for your family.

Amanda Barroso: Your point about spending more than your take-home pay on child care is an important one, I think.

Anecdotally at least, I've heard stories where mothers in particular drop out of the workforce because child care costs are equal to or even more than their take-home pay. And it just seems like the logical thing to do when you're in that moment.

But can you walk us through why parents should give this decision some more thought?

Kim Palmer: I think when you are calculating those child care decisions for yourself and for your family, you really can't just look at your current annual budget or your monthly budget, because the choices that you make today really impact your future earning potential as well.

And I think it's really easy to make the mistake of saying, "Oh, all my take-home pay is going towards child care, so I should stop working." But it's actually so much more complicated than that, because the choice that you make also impacts that future earning potential that you have. And I think that's what makes this so different compared to other budgeting decisions.

Alieza Durana: Thanks for helping us think about how these financial decisions can impact parents in the long run. While not all parents are going to be able to keep working, just to pay for child care, I think some of these long-term considerations don't get enough attention. And they can have a big impact on parents' financial futures, especially when it comes to saving enough for retirement.

Amanda, have you made any tweaks to your budget since adding child care?

Amanda Barroso: Absolutely. The biggest thing is pretty drastic, actually. We moved from Washington, D.C., to the Atlanta area to get child care help from my parents. My parents are retired.

And I realize now saying this, it's not something that is accessible to anyone — to just pick up and move, to have a remote job like I do gives me the flexibility to do that. And it's absolutely a privilege.

It has been a huge help in the budget, though. In the fall, we do plan to send our daughter to a half-day preschool program that — just hold your breath here — it's only $200 a month. We were paying $1,360 for full-time infant care.

This is a half-day situation, but this kind of half-day preschool program was something that didn't even exist in the Northern Virginia area where we were living. So we're definitely going to take advantage of that.

And we're actually going to use my husband's FSA program to pay for that. The other smaller thing that we've done lately is review our household subscriptions. Most of the time, these sneak up on me.

They auto-renew without me even really realizing it until I look at my credit card statement. I'm like, "This seems really high." And of course, all three of them hit the same month or something, and my budget just gets busted.

So recently, one of the things that we looked at was our Sirius XM subscription on our car. My husband and I both work remotely now. And we don't have the long commutes that we used to. So we were like, "You know what? Let's just cancel it."

I'm not rich now, by any stretch of the imagination — it's like $160 a year. Child care is not all of a sudden affordable, but it did feel really good to create a little bit of wiggle room in our budget. And we could now redirect that money toward some of our other savings goals.

Alieza Durana: We have covered a lot of ground today and worked our way from federal tax policies to state-level resources to personal finance tips.

Amanda Barroso: Well, that's all we have for this episode. I hope that we've helped clarify some of the federal and employer benefits that can feel really overwhelming to parents.

Our goal is to clarify life's financial decisions and help people make them with more confidence.

If you have questions about managing the cost of child care, reach us on the Nerd hotline by calling 901-730-6373. That's 901-730-NERD. Or email [email protected].

Alieza Durana: Also, visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you're getting this podcast.

And here's our brief disclaimer, thoughtfully crafted by NerdWallet's legal team: Your questions are answered by knowledgeable and talented finance writers, but we're not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.