I thought I had seen all the “real world” had to throw at me after getting married, having a baby, buying a house, and spending a few years in the corporate world. But, nope, you don’t become an adult until you pay for childcare. The costs are absolutely insane!
According to New America, the national average for full-time, center-based care is $9,589 per child. Combine that fact with a report from the St. Louis Fed that the median household income is $56,516, and it’s easy to see the problem. If you’re not careful, childcare can eat up a significant portion of your income.
But there is one piece of good news–you might be able to save significantly on childcare by leveraging the tax savings opportunities and paying with credit cards to earn cash back. I’m going to show you how you can save thousands on child care in a single year.
For starters, the Child and Dependent Care Tax Credit will cut your tax bill, most likely by an amount between $600 and $1,200. That’s because once you reach a salary level of $43,000, you’re limited to a maximum credit of $600 if you have one child or $1,200 for multiple. But still, at $600 you essentially reduce the cost of childcare from $9,589 to $8,989, which isn’t a bad start. An FSA can help too, more on that below.
Credit Card Rewards Provide Relief
But what if you could also pay for childcare with a credit card? At my son’s daycare, this is an option (and preferred by all parties due to its convenience). But even if it isn’t something your facility explicitly offers, you should be able to use Plastiq. There’s a 2.5 percent fee, but the cash back from promotional bonuses will make up for that, as would any other earnings above 2.5 percent. For more info on that specifically read our post about Plastiq (everything we say about mortgages there is also applicable to childcare).
In the math and examples below, I’ll assume you can pay with a card directly through the facility. Here are two scenarios for how you might leverage that opportunity to save even more money on your childcare.
Use an Everyday Cash-back Card
Option 1: Use a standard, everyday cash-back credit card. Depending on how your child care center is set up, this may be the more practical option for payment. Our daycare doesn’t have an online account that we manage; we just give our credit card info to the school’s administrator, who handles payment each month. Because of this setup, using the same card all year long is easiest. It would be an awkward and clunky experience to contact the office in order to change the credit card repeatedly. Probably doable, but it would be uncomfortable.
Instead, I can earn an effective three percent cash back using the Discover it® Miles – Unlimited 1.5x Rewards Card, because during the first year I’ll earn 1.5 percent plus a match from Discover. So using the average costs, I’ll save $287.67 in a year (3 percent of $9,589). With the tax credit, this equals a total savings of $887.67, or 9.25 percent. If they don’t accept Discover, your next best option is a two-percent back card. In that case, you’d save $191.78 by using the card (plus $600 tax credit).
Earn Bonuses with Minimum Spend
Option 2: If you’re lucky enough that you can change the credit card you use for child care frequently (without unnecessary hassle), then that expense might be a good contender to help you meet minimum spend on credit card bonuses. There are a TON of options for cards that can help you do this, but for simplicity, I’ll use the same four I identified in our post about paying your mortgage with Plastiq. Those were the Capital One® Spark® Cash for Business, Capital One® Venture® Rewards Credit Card, Barclaycard Arrival Plus® World Elite Mastercard®, and SimplyCash® Plus Business Credit Card from American Express. One important thing to remember is that the cash value I’m assuming for the Barclaycard and Venture® Rewards card is for travel redemption. If you would spend that money on travel anyway, then this is effectively cash back. On the other hand, for the Venture card you can redeem the points at half value for cash back. Just something to keep in mind!
As I mentioned in that other post, my favorite to recommend is probably the Capital One® Spark® Cash for Business, because its bonus of $590 is so generous and many people have already maxed out on opportunities with Chase.
Its an underrated card for sure, and one that can singlehandedly take a HUGE chunk out of your childcare bill. The card has great long-term value as well, so you can’t go wrong with adding this one to your portfolio.
Note: I’ll assume that you use one of the four cards mentioned above each quarter to pay all of your child care expenses. And rather than listing out all of their specific details, I’ll average all of that together in the math here. Again, read our other post or check out our cards page to see the specific details that I’m not including here. Important note: The figures here were calculated when the Barclaycard Arrival plus bonus was valued at $588. It’s currently valued at $483, so keep that in mind here.
OK–Quarterly, you would spend $2,397.25 on child care (using the average costs), and you would need to spend an additional $1477.75 more to reach the quarterly average minimum requirement of $3,875 on the cards. So your child care spending would represent 61.8 percent of the total minimum spend. You would earn $1,938 in cashback from those four cards at the end of the year, and technically $1,182.18 of that (61.8 percent) could be attributed directly to the child care expenses.
But for our purposes we will consider all of the cash back as savings on the childcare, since that was the main goal. In effect then, you would reduce your childcare costs by $2,538 (including the tax credit and cash back), bringing down your childcare costs to $7,051 (a total savings of 26.4 percent!). That’s pretty much like paying in cash but only sending your child for three quarters of the school year!
What about a Dependent Care FSA?
A dependent care FSA can likely help you earn more savings than the Child and Dependent Care Tax Credit, if your company offers one. Most people are in a position where they need to choose between the FSA or the tax credit (not both). If you have one child and opt to use the maximum dependent care FSA withdrawal, you’ll have $5,000 tax-free dollars to put toward childcare. At the 25 percent tax bracket, that would save $1,250. Add that to the $1938 you can earn with credit card rewards, and you’ll have a total savings of $3,188. Note: If you have two kids receiving care, you might be able to use the $5,000 in FSA funds and the remaining $1,000 in the tax credit.
If you use the FSA approach, you can pay by credit card and then reimburse yourself from the FSA account.
The main takeaway is that if your child care center allows payment by credit card, you should strongly consider leveraging it as a way to save money. If they don’t take cards, you might even be able to use Plastiq, if you do so in a way that offsets the fee.
And you don’t have to follow this guide exactly. I gave you a simple plan to follow with the Discover It Miles, but another option would be to use the “bonus” approach, but change cards less frequently (just getting two bonuses per year instead of four, for example).
Whatever the case, I hope you can knock a few dollars off your childcare expenses, one of the biggest line items in many household budgets.