Child Care Options for Your Growing Family

John Wolff, CFP®, AIF®, EA |
As my wife and I are entering new careers that are starting to take off, we are also getting to the point in our lives to start family planning. One important consideration to take into account is the steep and rising cost of childcare. When making the decision on whether or not to return to the workforce, there are number of factors to take into consideration.
The results from’s annual “Cost of Care Survey” sheds light on the increasing costs of childcare and the strains it imposes on working parent’s budgets:
  • 85% of parents report spending over 10% of their annual budget on childcare costs (a figure up from 72% in a single year). According to the US Department of Health and Human Services, child care is considered affordable when it comprises no more than 7% of household income.
  • 57% of families spent over $10,000 on childcare in 2020.
These statistics highlight the need to either properly plan a return to the workforce or decide that it makes more sense to discontinue work and care for the children full time.
The pandemic of 2020 drastically changed the way in which many people work, from sitting in a cubicle for eight hours a day to working fully remote from the comfort of one’s home. The permanency of this change is yet to be fully realized across all sectors as employers have to either  allow their employees to work fully remote or mandate employees come back to the office a few days a week or full-time. This is something to consider for those who would like to continue to work but find the costs of childcare overly burdensome.
Sometimes one must go a more creative route to mitigate the costs of childcare, such as utilizing a nanny-sharing program. By sharing the costs of a nanny with other families, one is able to lessen the burden of the cost to hire a nanny.  Another option is to rely on grandparents or other family members or friends to relieve some of the burden of caring for the child.  Since not everyone is blessed with the luxury of grandparents nearby to help, the tax system is another way to make the most of paying for childcare while working. There are some very advantageous tax benefits and credits that the IRS has made available to working parents.
One method of paying for childcare with pre-tax dollars is to utilize a Dependent Care Flexible Savings Account. Many employers offer such a plan which allows the participant to contribute up to $5,000 in 2022 for those filing either as Single, Married Filing Jointly, or Head of Household. Eligible costs include a wide variety of child care services such as hiring an au pair, before and after school programs, daycare, day-camps, nanny’s, preschool and nursery school. This benefit is normally limited to children under the age of thirteen.
The child tax credit is another significant benefit under existing tax rules. To give a bit of history, in 2020, the credit was worth up to $2,000 per child under the age of sixteen and was refundable up to $1,400 per child for qualifying low-income earners. In 2021, changes were made to the credit that increased the amount allotted to $3,600 for children under the age of six, increased to $3,000 for children between the ages of six to seventeen, and made the credit fully refundable. Adjusted Gross Income (AGI) limitations do apply in this case. The structure of payout for the credit was amended for 2021 as well. The IRS decided to issue the refund in monthly payments for the second half of 2021 and the amount of the payment was based on one’s 2020 return. There are several other changes that are laid out in the Build Back Better program and whether or not they will become instated depends on whether the legislation ultimately gets passed.
The decision to return to work is multi-faceted in that there are not only short term costs but also long term factors that must be taken into account as well. By taking years off to raise children to school-age, the parent loses not only those years of earnings but also the wages that would be paid if they continued to work, including annual raises and/or Cost of Living Adjustments (COLA). The chance that one will re-enter the workforce at the same or higher level of earnings is minimal. Not only will one be searching out a job with an experience gap, but there are other issues such as not staying up on trends depending upon the industry one leaves and attempts to reenter.
Some financial considerations include not being able to make contributions to 401k and the loss of employer match. Similarly, if the benefits package one receives is better than the spouse’s, those extra costs will take a drag on the budget if the spouse decides not to immediately return to the workforce. The loss of income and potentially lower income generated  after a longer term break will have a direct impact on the amount of Social Security income one will receive later in life.
One other way of looking at a second income from a tax standpoint is to see that second income overlaid on the primary income earner’s salary. Because the secondary income could effectively be taxed at the highest income bracket, the net amount needs to be taken into consideration with compounding factors such as the cost of childcare to calculate the effective take home pay. In some cases, going back to work may be more costly that staying at home. This can be calculated by taking into account the net of tax income and comparing that to the childcare expense.
Going back into the workforce is not always a necessity from a monetary standpoint and the choice may not always be dictated solely by immediate budgetary concerns. The best way to decide whether or not to return to workforce after having a baby and in the early years of child-rearing is to not only look at the financial impact of the decision but also the emotional and social impacts inherently present in the decision. There may be a true satisfaction that comes from working which can make the return to work more important than the monetary benefits from staying at home.  Ultimately the decision is intensely unique to your family, so consider discussing the above factors with a financial advisor to gain insight and clarity.


This information is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept. These materials are not intended as any form of substitute for tax, legal, or individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.
Certain information contained herein was derived from third party sources as indicated. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. We have not and will not independently verify this information. Where such sources include opinions and projections, such opinions and projections should be ascribed only to the applicable third party source and not to Rembert Pendleton Jackson.