Got $20,000? It could help pay for college tuition — or it can foot the bill for daycare expenses.
That’s close to the annual childcare bill for Kathleen and Dustin Farhat, a couple in Bath, Michigan, according to a report in “Bridge” magazine, published by state-policy think tank The Center for Michigan.
Childcare for the Farhats’ two children, a 5-month-old and a 3-year-old, will run $23,200 over the course of 50 weeks, the Center found.
In comparison, the typical middle-class family can expect to pay about $40,000 for four years of tuition, fees, books, room and board at the University of Michigan, if they are state residents, according to The Center.
The Farhats aren’t alone.
Across the country, the average annual cost of childcare is approaching parity with the cost of in-state tuition at some universities, according to data from Child Care Aware of America, an advocacy group.
Here’s how expenses measure up elsewhere.
In Massachusetts, families are paying an average annual cost of $34,381 to place an infant and a 4-year-old in center-based childcare, according to Child Care Aware.
The Bay State is the least affordable state for families of infants or toddlers in center-based care, Child Care Aware found..
To put things into perspective, a year of out-of-state tuition at the University of Massachusetts Amherst, costs about $34,570.
Even in places with a lower cost of living, having someone look after your little ones is taking a large bite out of your income.
See below for a chart.
“A lot of clients are entering the phase of their life where having a family is top of mind,” said Douglas Boneparth, president of Bone Fide Wealth in New York. “Childcare can be like a second rent payment.”
It isn’t impossible to do it all, financial planners say, but some tough choices must be made.
In order to reduce the amount of childcare you need, you can talk to your employer about working from home one or two days a week.
This arrangement can be easier said than done, especially if your children are very young.
Another alternative is a “nanny share” with another family, so you can help split the cost of hiring a professional.
Be aware that if you pay your nanny off the books, you run the risk of owing the IRS back taxes and penalties.
If you pay your helper more than $2,100 in 2018, you are responsible for withholding Medicare and Social Security taxes. This adds up to 15.3 percent of wages and is divided between the worker and the employer.
If you want to claim the child and dependent care tax credit — which is up to $1,050 for one child under age 13 or $2,100 for two or more kids under 13 — you’ll need to be honest with the IRS about your employment relationship with your nanny.
Depending on your income tax bracket, you should also consider whether it makes sense to use a dependent care flexible spending account — if your employer offers one.
You may not use the tax credit and the FSA to cover the same expenses.
You may contribute up to $5,000 each year to a dependent care FSA on a pretax basis to help cover the cost of daycare, preschool and other costs.
If your net pay is in the neighborhood of what you’d pay your caregiver for looking after your child — and if you aren’t the spouse providing the family’s health insurance — it might be worth considering sitting out, said Boneparth.
In New York, for example, he estimates that if one parent has a gross salary of about $65,000, it may make sense to have this conversation.
Here’s the tradeoff: If you sit on the sidelines, you lower your lifetime earnings, reduce the amount you can save in your 401(k) plan and pause your contributions to Social Security.
The Center for American Progress estimates that a 26-year-old woman who is earning $30,253 and takes off five years to provide care is losing $467,000 over the course of her career — a 19 percent reduction in her lifetime earnings.
Married couples who convert to a single-income household can consider funding a spousal IRA in order to shore up the non-working spouse’s finances.
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