Even high-income families often struggle to fit childcare into their budgets. However, when you know how to execute a careful childcare and tax planning strategy, you could make this expense more manageable.
The Landscape of Childcare Costs
Although most people know that childcare is expensive, few people understand how serious the affordability issue has become.
Federal guidelines state that childcare is “affordable” if it costs no more than 7% of a household’s income. Recent research indicates that for an average family (with two children) to spend just 7% of its income on childcare, the family would need to make over $400,000 per year.
While childcare costs can vary dramatically by location, it’s not unusual for them to rival or even surpass housing costs. Jesse Kuusisto, CFP®, Wealth Manager at Laurel Wealth Planning shares, “I’ve heard parents describe their day care bill as a second mortgage.”
What Tax Breaks Are Available
These are two major tax breaks that can help with childcare and tax planning.
Dependent Care FSA
Some employee benefit plans include Dependent Care FSAs. These flexible spending accounts are excellent childcare and tax planning tools. They allow you to deposit pre-tax dollars into an account and use that money to pay for childcare. The maximum amount you can deposit into your Dependent Care FSA increased substantially from 2025 to 2026, from $5,000 to $7,500 for individuals and married couples filing their taxes jointly.
Per Jesse, “You benefit not just from avoiding income tax, but avoiding FICA tax as well. And your Dependent Care FSA funds can be used to pay for qualified day care, nursery, or preschool, before-school and after-school programs, summer day camps, and nannies or babysitters.” However, Jesse cautions, “With this type of account, plan carefully because it is use-it-or-lose-it, meaning any funds not used by year-end are forfeited.”
Child and Dependent Care Tax Credit
If you do not have access to a work Dependent Care FSA account or are uncertain about your child care expenses, instead consider taking a credit on your taxes.
Jesse shares, “If you pay for childcare so that you can work, you may qualify for the Child and Dependent Care Credit, which covers up to 20% to 35% of childcare expenses. The lower a household’s income is, the larger the percentage the household may qualify for.”
However, the credit applies only to a portion of your childcare expenses:
- Up to $3,000 for one child
- Up to $6,000 for two or more children
This is a nonrefundable tax credit, which means it can offset your tax bill but you won’t receive a refund for anything above what you owe.
Family Support and Gifting Rules
With so many parents struggling financially, some grandparents want to help fund childcare costs. For grandparents who are concerned about gift and estate taxes, there are two ways to balance childcare and tax planning.
First, they may make gifts directly to family members. Gifts that are under the annual exclusion amount ($19,000 per person for 2026) do not have to be reported on the grandparents’ tax returns. Jesse builds on this strategy saying, “Because the gift is made to the family member, that family member can use the funds to fund a Dependent Care FSA account and/or take the tax credit as long as the same dollars are not used for both benefits.”
Grandparents who want to give more should check the status of the day care. Certain day cares may allow additional gifts without triggering the IRS reporting requirement if they can be categorized as an educational institution. In this case, these gifts should be made directly to the daycare.
Planning Impacts
Childcare and tax planning don’t happen in a vacuum. Jesse shares, “When you’re adding up childcare costs, you also need to keep your other goals in mind. For example, planning for your household cash flow, contributing to your retirement fund, and saving for your child’s college tuition.”
Balancing childcare and tax planning with other obligations can be difficult. However, a skilled financial advisor can work with you to create a financial plan based on the big picture.
Need Help With Childcare and Tax Planning?
Childcare and tax planning can get very complicated very quickly. Busy families often get lost in navigating care options, tax breaks, and cost comparisons. That’s where Laurel Wealth Planning LLC comes in. We focus on creating customized, comprehensive wealth management plans for our clients and client care is at the heart of everything we do. We honor your trust by delivering customized solutions, consistently following through, and always striving to exceed expectations, so we succeed together while pursuing your financial goals.
To schedule a complimentary meeting, email laurel.wealthplanning@laurelwealthplanning.com, get in touch online, or call (952) 854-6250. Find out if the Laurel Wealth Planning team is the right financial advisor for you based on your wants and needs.
Frequently Asked Questions
What are the best tax strategies for childcare expenses?
Childcare can be a significant financial burden for families, but there are tax strategies available to help reduce these costs. Programs like the Dependent Care Flexible Spending Account (FSA) and the Child and Dependent Care Credit allow parents to offset some of the expenses, providing much-needed relief when balancing childcare and tax planning.
How can I reduce my childcare costs with tax breaks?
Families paying for childcare may qualify for tax breaks like the Child and Dependent Care Credit, which can cover up to 35% of childcare costs. To increase savings, parents might also consider using Dependent Care FSAs to pay for eligible childcare expenses with pre-tax dollars, reducing taxable income and providing more financial flexibility.
How can a financial planner help with childcare and tax planning?
A financial planner specializing in childcare and tax planning can help families navigate the complexities of tax credits, savings options, and cost comparisons. By reviewing your tax returns and working closely with your CPA, they can provide strategic advice that reduces your childcare expenses while helping you experience long-term financial wellness.
About Jesse
Jesse Kuusisto is a Wealth Manager at Laurel Wealth Planning, a full-service, fee-only firm based in Minneapolis, Minnesota. As a skilled CERTIFIED FINANCIAL PLANNER® professional, Jesse excels at bridging personal and financial goals, developing client relationships, and properly implementing investment recommendations. Joining the LWP team in 2017 as an Associate Wealth Manager, he was promoted to Wealth Manager in 2021 and added the role of Investment Operations Manager in 2022. He shares, “I enjoy collaborating with clients to create a financial plan as well as implement it. It is the perfect way for me to utilize my analytical mind and help people at the same time. The high standards to which Laurel Wealth Planning holds itself give me a strong sense of pride in the work I do. I feel my values align with those held by the individuals at Laurel Wealth Planning and I am honored to be a part of the team.”
Jesse’s passion for wealth management began in high school during a stock market simulation. He graduated with honors from Augsburg College, earning a Bachelor of Arts in Finance with a minor in economics. While in college, he was the Accounting/Finance chair for the Augsburg Business Organization and captain of the track and field team. Outside of work, Jesse enjoys staying fit, spending time outdoors, and following Minnesota sports, particularly football. He values close relationships with his family, including his twin sister, and stays connected with friends through fantasy football. To learn more about Jess, connect with him on LinkedIn.
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