Blog

Here are some of the tax implications of hiring a nanny or sending your child to day care:

1) Day Care: You can claim the child-care tax credit if you pay for care for children younger than 13 while you work. You can count up to $3,000 in qualifying child-care expenses for one child, or up to $6,000 for two or more children.

If your employer offers a dependent-care flexible spending account, that may be a better deal. You can set aside up to $5,000 a year to cover child-care costs for children younger than 13. The money you contribute to an FSA escapes income taxes, Social Security and Medicare taxes. You might be able to take advantage of both tax breaks.

2) Hiring a Nanny: You must withhold and pay Social Security and Medicare taxes if you pay a household employee $1,800 or more a year. To pay these nanny taxes there’s lots of paperwork involved.

What savings vehicles are best?

Savings Account: Monthly deposits of $100 for 21 years with an interest rate of 0.48% compounded annually you would have a final savings balance of $26,506.42. This is clearly not outpacing inflation with its current average of 3.22%

529 Plan: Money put in grows tax deferred as long as it’s used for qualified education purposes. The funds can continue to grow indefinitely until they are used.

Brokerage Account: Stocks can teach investing sills for late in life. This type of account you have more options and less restriction on what and when the money can be used. As the child gets you can teach them about companies, educate them on the financial world and teach them how the stoke markets work.