August is here and that means the summer is drawing to a close, which also means school is drawing nigh. Usually, this time would be full of back to school shopping for clothes, supplies, and gear, but this year, with the ongoing pandemic, many moms are at a loss of what to do.
Some school districts are opening up on regular school schedules with sports and all. Other districts are going to a fully online school year. Many are somewhere in the middle. This time of uncertainty has caused a lot of stress on moms, kids, and families in general. In today’s post, I hope to not only reduce your stress but also give you some ideas of how to best use your financial resources.
Step 1: Utilize your Flexible Spending Account (FSA) for education & childcare
Flexible Spending Accounts (FSAs) are employer-sponsored benefit accounts that can be used to pay for medical and childcare expenses with tax-free dollars. The account for childcare expenses is usually called a Dependent Care FSA and can be used to pay care for a child under the age of 13. Typically, the money is taken from your paycheck with before-tax dollars, put into an FSA account, and then transferred back to you when you submit a claim. Claims can be used to pay for:
- Before or after school care
- Babysitting and nanny expenses
- Daycare, nursery school, and preschool
- Summer day camp
- Virtual learning
With the passage of the CARES Act earlier this year, many employers have opened up the opportunity for you to open, increase or decrease contributions to your Dependent Care FSA account beyond the typical enrollment period. This has allowed many to change their amounts due to changes in employment status, FMLA leave, or the change in the number of dependents.
If you are experiencing a change in your intended method of education and/or childcare for the remainder of this year, it is a good idea to check with your employer and find out the status of your FSA account. You can either start contributions to help pay for upcoming needs or decrease contributions if you have decided to change your intended childcare or preschool needs and you won’t need as much money in the account as originally expected.
The upside with FSA accounts is that the money is tax-free so you will never be taxed on this amount used for the above scenarios. The downside is that you have to estimate how much you think you will use for the upcoming year and hope that guess is accurate. Many employers allow FSA accounts to be used a few months into the next year if there are still funds available in the account, but check with your employer. Regardless of the date by which funds must be used, it is a use it or lose it situation, so it is important not to overfund your FSA account.
Step 2: Finding innovative ways for childcare
Given that the pandemic is ongoing, some companies are more flexible with childcare situations than in the past. Some companies allow parents to fully work from home without having to go into the office. Others allow for staggered work schedules so one parent can stay home while the other works on various days of the week. One idea might be to find another mom in a similar situation who can maybe work from home a different day of the week and then you are able to swap out babysitting and have a couple of days a week covered. You can also work out a similar agreement with your spouse to have both of you help provide childcare as needed.
Another option is to utilize a high school or college student for babysitting in emergency childcare situations when the daycare, preschool, or school is closed. Many colleges and even secondary schools are offering online classes and alternating schedules that allows students to have more flexible schedules than in the past.
Finally, some parents are choosing to hire a nanny or even do a nanny share. This can be very beneficial but can be an expensive option. Keep in mind that when hiring a full-time nanny or childcare provider inside your home, you become an employer and must withhold payroll taxes and pay social security and other payroll taxes at both a federal and state level. If you are thinking of this option, make sure and discuss this with your tax expert to make sure you are following all federal and state guidelines for hiring an employee.
Step 3: Utilize other methods for tuition or other school-related expenses
Some parents have decided to place their children into private schools since many public schools are altering their regular school schedules. If needed, a parent can now use 529 funds to pay for tuition and qualifying expenses up to $10,000 a year for tuition at K-12 public, private or religious schools (for further information, see IRS tax regs here).
Other parents have decided to home school their children this year. For those who choose this method, unfortunately, you can no longer use 529 funds for homeschooling and the federal government doesn’t offer any tax breaks or incentives for homeschooling. You may find that your state can offer some tax relief. For example, three states offer tax credits for homeschooling:
- Illinois offers an education expense credit that allows you to deduct 25% of your expenses greater than $250 (limited to $750 with an income cap).
- Louisiana offers a school expense deduction that gives you 50% of your actual costs per child up to $5,000 total.
- Minnesota offers a K-12 Education Subtraction and Credit. This credit works like an expense deduction and offers various rates depending on the grade (note this credit does have an income cap).
Other states offer free curriculum (usually non-religious) from various organizations and/or charter schools that receive public funding for their curriculum. Some states may reimburse for classes as well as give a technology allowance to buy computers, software, and other electronic needs1. Check with your tax professional to find out more about the rules in your state.
I personally know this time can be very stressful for any mom who is trying to decide how to balance her office work with her home life while not having the typical schooling and other daycare options available as in the past. I hope these suggestions will help you as you try to make these difficult decisions during a difficult time.
1 Note that the state may require your children to take the state testing if you decide to follow this option, but you need to check with your state and the provider to see if there is an option to opt out of testing.