Childcare Cost Savings: Tax Credits & Financial Assistance for Parents

Parents with hefty childcare costs may get a bigger reprieve this year.

For working parents, childcare can be a major expense. It's estimated that 55% of U.S. families spend at least $10,000 a year for childcare, according to Care.com. And during the pandemic, some families' childcare costs may have skyrocketed.

The reason? A large number of school districts have yet to return to full-time, in-person learning. But many parents rely on schools as a place to send their children so they can work during the day. As such, a lot of families have had to scramble over the past year, busting their budgets and dipping into their savings to pay for daycare centers and nannies to take the place of the coverage they'd normally get through schools.

If your childcare costs have gone up during the pandemic, here's some good news. You now have an opportunity to contribute more money to your dependent care flexible spending account (FSA). And that could leave you with extra tax savings to enjoy.

Dependent care FSA contribution limits are up

A dependent care FSA allows you to set aside pre-tax dollars to pay for qualified childcare expenses, like daycare centers or summer camp. Normally, the annual contribution limits for these accounts are $5,000 for singles and married couples filing jointly -- and $2,500 for married folks filing separately.

This year, these limits are rising. Now singles and couples filing jointly can contribute up to $10,500 to a dependent care FSA, while married couples filing separately can contribute up to $5,250. If your childcare costs meet or exceed these limits, these changes could help you eke out some extra savings.

Say you're in the 24% tax bracket (meaning, that's the amount of tax you pay on your earnings) and you can now contribute $10,500 to a dependent care FSA instead of $5,000. In a normal year, you'd save $1,200 (24% of $5,000) on taxes. This year, you stand to save $2,520 (24% of $10,500) by maxing out your dependent care FSA.

Now the tricky thing about dependent care FSAs is that you're generally required to commit to a contribution the year before, and once you make that election, you can't change it. But since, this year, the contribution limits for dependent care FSAs changed during the year, most employers will let you change your election.

Another thing you should know is that dependent care FSAs generally work on a use-it-or-lose-it basis, so you can't carry funds from one year to the next. But this rule is being tweaked because of the pandemic. Now, you can roll unused funds from your 2020 dependent care FSA into 2021 or 2022 so you don't have to forgo that money if you didn't get a chance to spend it last year.

A lot of daycare centers and summer camps shuttered in 2020, but some parents may have opted to max out their 2020 dependent care FSA contributions thinking the year would be business as usual. (FSA elections for 2020 were probably made in the fall of 2019, before the pandemic was on anybody's radar). If you were left with an unused balance from last year, you now have options to spend it.

Don't miss out on extra savings

Childcare expenses can eat up a huge chunk of your budget, so you might as well do what you can to save money on them. It pays to see if you're eligible to raise your 2021 dependent care FSA contribution if you made your election based on the old limits -- and snag some tax savings in the process.