Having children has always been an expensive prospect, but a new analysis from real estate service Clever reveals that the average cost of raising a child has increased $31,000 since 1960. In fact, as of 2015, parents were spending 1,175% more on child care (yes, you read that correctly) and 155% more on health care than they did roughly 60 years ago.
Now to be fair, incomes have risen across the board, too. But to give these figures some context, spending on housing and transportation only went up by 5% and 9%, respectively, during the aforementioned window. Meanwhile, spending on food and clothing declined.
If you’re struggling to keep up with your child care costs, and are burdened by rising health care expenses, you should know that there are tax-advantaged means of saving and paying for both. And capitalizing on these breaks could make a world of difference for your finances.
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1. Affording child care
Child care costs have been going nowhere but up. Clever reports that since 1990, day care and nursery school rates have grown 175%, while private school tuition has increased over 43% since 1999. Unfortunately, many parents have no choice but to pay for care to keep their jobs, so if you’re one of them, be sure to take advantage of a dependent care flexible spending account. Currently, you can set aside up to $5,000 a year in pre-tax dollars to pay for day care centers, summer camp, and other such child care programs. That $5,000 is earnings the IRS can’t tax you on, thereby putting some of it back in your pocket.
2. Covering health care costs
Paying for health care expenses with pre-tax dollars can make them more manageable. You have a couple of options in this regard. The first is a flexible spending account, or FSA, which currently lets you allocate up to $2,700 a year to pay for things like doctor visits, medication copays, and approved medical equipment and supplies. The funds in your FSA must be depleted on a yearly basis or you risk losing them, so when contributing to an FSA, be sure to estimate your out-of-pocket spending accurately.
A second tax-advantaged option for paying for health care is a health savings account, or HSA. Like FSAs, HSAs are funded with pre-tax dollars, only you don’t need to use up your balance year after year. Instead, you can invest the funds you don’t need immediately for tax-free growth, and take tax-free withdrawals for qualified medical purposes. In fact, you can even use an HSA as a retirement savings tool.
To qualify for an HSA, you must be enrolled in a high-deductible health insurance plan, which, for the current year, means $1,350 for individual coverage or $2,700 for family coverage. If you qualify, you can contribute up to $3,500 to an HSA as an individual and up to $7,000 on behalf of a family. And if you’re 55 or older, you get an extra $1,000 to put in on top of whichever limit you qualify for.
Though life is more expensive now in general than it was back in 1960, when it comes to raising children, child care and health care have seen the greatest uptick. Finding strategic, tax-advantaged ways to cover these expenses can help make them a lot more manageable.
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