Question for STM's and/or tax savvy individuals

[Winnifred]

As I'm starting to wrap my mind around how much we'll be paying for childcare, I'd love to understand how much we can reasonably expect to receive back on our taxes once baby is born. I've been googling but everything is SOO confusing and I'm just not meant to understand taxes

Can anyone point me to a helpful (and brief!) resource? Or offer their own experiences up? We're married and in the 25% bracket and planning on paying for daycare (obviously).

Any resources would be appreciated! Enjoy your evening!

[emilie]

I am not an accountant but I do our taxes, do financial work, and have been looking at this as well. I find the TurboTax site to be helpful and easy to understand - way more so than the IRS site.

Keep in mind this is for federal only and for married filing jointly - I don't know what additional benefits your state may or may not offer.

Obviously the main thing determining how much $$ you will get back is how much you are withholding from your paychecks. Are you happy with the refund you're currently getting vs. the amount you're bringing home every month? Some people like to withhold a lot and then get a fat refund, and some people would rather just take that money home in their paychecks instead. If you want a big refund and you haven't been getting one I would withhold a little more from your checks now.

When you have a kid, it seems you get a few tax perks. If your kid is born in Dec and not Jan, bonus, because you get these perks for all of 2016.

Extra exemption - For each person in your family you get to take a personal exemption. For 2016 this is around $4K. So if you take an exemption for you, H, and LO, you get to reduce your overall taxable income by about $12K. This is $12K that you will not pay taxes on - but this is a deduction and not a credit so this is not an extra $12K in your pocket However, it should increase your refund by $1K in the 25% bracket.

Childcare tax credit - if you make under $110K jointly, you are likely to be eligible for the childcare tax credit which is I think $1K per kid. This is a credit and not a deduction so this IS an extra $1K in your refund. I think this phases out above joint income of $110K but you'd need to check the phase out rate.

Daycare - there are a couple options:

If one of your employers offers a daycare FSA, you can put away (between the 2 of you, not each) up to $5K in pre-tax money out of your paychecks to go towards daycare. I think this is an awesome option because it lowers your overall tax liability by $5K from the get-go - aka, you will owe less in taxes and will get a bigger refund. The downside is that it is use it or lose it, so make sure you will spend the amount you put away in the year you put it in the FSA. It does not roll over from year to year. You also each need to make the amount you put away (so if you want to put away $5K, you each need to make at least $5k annually.)

There is also the daycare tax credit, which you can use without the FSA option above, or with the FSA option above if your annual daycare expenses exceed $5K. This is also a credit, so it's added money right in your refund. If you make more than $43K combined annually, the largest credit you're going to get for one kid is $600. That is $600 extra in your refund, though! If you make less than that, you can get up to $1050 for one kid. If you use this with the $5K FSA option above, your daycare expenses need to be $8K or more annually to get the full credit here.

Ok, that is a novel, but I hope that helps.

[emilie]

I just found this page on the TurboTax site that gives a good rundown of everything. It seems I forgot the earned income tax credit which is also another credit that can increase your refund. With one kid this phases out at a joint income of $44651.

turbotax.intuit.com/tax-tools/tax-tips/Family/Birth-of-a-Child/INF12019.html

Also, I just have to put this here because they mention 529s (tax free college savings plans for parents). As someone who is pregnant and googling baby stuff all the time I see 529s advertised to me EVERYWHERE. While it is obviously noble to save for your kid's education, I would not do this unless you and your SO are maxing out your retirement accounts (401ks, and Roth if eligible). One of the VERY BEST ways to reduce your taxable income and to owe less taxes is to put money in a pre-tax retirement account like a 401k. I see so many people putting away for college who aren't maxing out their retirement first. Guess what? There are no student loans for retirement. If you have some extra money to move around, put yourself and your retirement savings first! Your taxes and your elderly self will thank you.

[Winnifred]

OMG emilie you are FABULOUS!!!!!! Thank you so much. I need to read this again slowly with DH. I handle technical/money related stuff alllll day at work but for some reason my brain just shuts off when taxes get brought up.

Thanks again for your awesome explanation and link!!

[requiressnacks]

emilie you are so wise! Me and MH really need to do more to decrease our taxable income and should take a closer look at this. I think it's so lame that the daycare account Max is $5000.

[WineNChocolate]

Lol Late to the game..but I couldn't of said it any better than emilie. We do something similar to an FSA with both our jobs and are able to recooperate at the end of the year 3,000 a piece, so 6,000 from that. We just send in receipts and a form and get reimbursement at the end of the year. We UNFORTUNATELY fall in the higher income threshold so we do not get any childcare tax credit so we rely on the other plan. We used to spend approx. 15,000 a year on child care before moving to Michigan. Thank the gods it dropped to more like 10K. But with the new one coming here we go again. But instead of 20-25K it will be 12-15K depending on which way we go.

Winnifred, I was curious what options have you looked at for child care. When I was searching I did all the big daycares and then I started searching for in home daycare and care.com as well. We found a lovely lady on google..just typing in daycares in our zipcode. She didn't really have a site I happened to run over her icon on the google map and gave her a call. SHE WAS A DREAM and cheaper than the bigger ones.

There is another option of Nanny Sharing, we didn't do this due to trying to find a couple at the last minute. BUT my gf does it and she has been doing it for 4 years, she loves her nanny. This allows you to get that nanny that might be 2,000-2,200 a month and split it between you and another family. But nice thing is that there is always a playmate and your child is just being looked after with just one other child..OF your choosing if you will.

Lastly, Au Pair, we are looking into this with the coming of our next lil one. SO not sure if you have the space to house an au pair but if your in the type of daycare price range I used to be..this is definitely comparable. I have two friends that have au pairs that they love, they cost about the same as daycare in most places, you do have to lodge and feed them but there is a great idea of having a nanny that is always right there.

IF YOU HAVE THOUGHT OF ALL THESE THINGS...sorry for going on and on. I know this all can be really frustrating.

[Winnifred]

Thanks, WineNChocolate! I appreciate your tax tips as well. I think we'll definitely start using our FSA's to cover the cost (or most of the cost) of childcare. It seems like you save a bit more money that way.

In regards to daycare - I've been looking for in home daycare for at least her first year. We might consider moving her to a center after that (depending on how things are going for her and for us financially). In home daycare seems to run $450 - $650 in our area and the centers all seem to start at $750/month. Personally, I'd like to start in the lower $500s and see how things go. I'm super curious about your location in MI, as I live here too! Feel free to PM me if you want to talk specifics or just local recommendations.

A friend recommended Great Start to Quality (I think this is just a MI thing) - so I've been using their site to find everyone in my zip code that has openings and pricing available online. However, another friend offered to care for our baby during her first few months, so I may get to extend the actual daycare finding a few more months. I'll still be paying this friend, and she'll watch the baby until her oldest gets out of school next summer. At least I hope that's the plan, we're going to talk more about it tonight. I would feel SO much better knowing she's in a home with someone I trust (who has three awesome kids herself) while she's still sooo little.

Oh and I've thought about the nanny sharing option, but I really haven't seen any opportunities like that around here. I would need to probably have more than just one other kid join in to make it affordable. If you have any resources for looking into that, I'm open!