I was finishing up with a colleague at the office when I saw my cell phone light up. It wasn’t a number that I recognized so I let it go. The office phone rang a few minutes later and my assistant advised that it was the school. Of course, it was. It was a dental emergency. I scrambled a little bit to get my things and headed out.
I’m at the dentist now with my MacBook Air propped up on my lap, still working. I’m lucky in that I have a job that allows me to dash away for last-minute emergencies and the occasional not-so-much emergency like parent-teacher conferences and school assemblies. I understand that this is a luxury, of sorts, and it is one that I “pay” for: I have foregone a lot of money and opportunities over the past nine years to have a flexible schedule. And most days, I don’t mind. It’s a choice that I’ve made after a lot of thoughtfulness. And wine. But mostly thoughtfulness.
It hasn’t been easy. There was a lot of maneuvering. I have three kids – and a needy dog – that I needed to frame my career and my working life around.
I took my first daughter with me to work every day. Heck, I owned the joint, so I could do what I wanted. By the time I had my second daughter, we were in a new office, one that was big enough to set up a play area where the children could hang out while I worked and occasionally amuse my staff who have, over the years, grown quite used to stepping around dinosaur hunting grounds and nicely avoided tripping over cardboard time machines.
My third child changed everything. Now I was the mother of three kids, each of whom desperately wanted my attention, and I was still trying to figure out that work/life balance that I was sure I could handle. I did not want to stop working (I happen to love what I do) but I couldn’t see putting the kids in full-time daycare: that was never part of our deal.
And then my husband mentioned the b word. Babysitter.
A babysitter turned out to be a perfect childcare solution for our family for a couple of years (we still have the same babysitter to this day for the occasional evenings out, she’s awesome). From a financial perspective, it was really tough. Quality childcare isn’t cheap. And overnight, we went from being parents to being employers: for federal income tax purposes, our babysitter was a household employee. That meant withholding and paying payroll taxes in addition to paying a salary.
It was supposed to work out, though, from a dollar perspective. In exchange for paying for childcare, we would qualify for the Child and Dependent Care Credit on our taxes. But here’s the thing that you don’t know until you start working: it’s never as good as it sounds.
If you pay someone to watch your qualifying child or dependent (generally, a child under age 13) while you work or look for work, you can, in theory, claim the Child and Dependent Care Credit. The credit is not a straightforward deduction – it is rather a percentage of the amount of expenses actually paid for care. The amount claimed can be up to 35% of your child care expenses, depending upon your income.
Sounds great, right? Not really. First things first. Full-time care for a two-year-old child costs, on average, $611 per month – or just under $7,500 per year per child. In metropolitan areas like mine, it tends to run closer to $1,000 per month – or more than $12,000 per year per child (that is, in fact, the cost of my daughter’s preschool for the school year).
As the mother of three children, this means that if I work full time outside of the home, I can expect to spend about $36,000 on child care. Let’s assume that I make $50,000 – higher than the median income in the US. My entire after-tax salary will go towards paying for child care. My tax credit, however, is limited to $6,000 for child care expenses. That’s because, for 2011, the cap is $3,000 for one child or $6,000 for two or more children.
The amount that you can claim decreases as your wages increase. This is an interesting concept because, at least theoretically, higher wage earners tend to require more hours of child care than lower-wage earners. In other words, if I were still working at a Center City law firm – 80 hours per week to meet my billables – I would be making more money, sure, but I would also be spending more because my child will require more hours of care. However, for tax purposes, I will actually receive a smaller percentage benefit for child expenses.
How much smaller? For qualifying income of $43,000 or more, the credit is 20% of the amount of expenses actually paid up to the cap. Using $50,000, that means that I could claim up to the smaller of $10,000 (20% of $50,000) or $6,000 (the statutory cap) – in other words, $6,000 even though my expenses are closer to $36,000.
So, it stinks for higher wage earners on a purely tax and economic scale but it should work out well for lower-wage earners, right? Nope. This credit gets you coming and going. The credit is figured based on the lowest earned income as between you and your spouse, not the total. So if you only made $15,000, the maximum credit that you could claim for two or more children would be $5,250 (35% of $15,000 since the rate is higher for lower-wage earners) – even though you still likely spent close to your entire wages on child care.
Part-time? Same calculation.
And if you freelance or own your own business? Potentially disastrous. Qualifying income must be from wages or salaries or net earnings from self-employment. That’s right, net. Whereas you can include your gross income from wages to figure the credit, you include net income from self-employment. So a tough year means that you don’t benefit from the credit – even if you needed the child care. And if you lose money, you get a big fat zero in the child and dependent care credit column.
So, if those taxpayers who make a lot of money don’t benefit – and those who find it difficult to pay for child care don’t benefit – who exactly benefits from the child care credit? Ironically, based on pure economics, it’s someone who doesn’t need the credit at all: a taxpayer who works for wages (ideally, issued a W-2) and whose spouse makes enough money to pay for child care out of his or her salary.
Maximum economic benefit – and it makes no sense.
What kind of policy are we pushing here?
It’s easy to moralize and be judge-y about other people’s choices. And as women, I think we’re particularly terrible about doing this. We say that mom works too much, that one not enough. That woman has too many kids, that woman too few.
Here’s what I think: I think we do it because we’re never truly comfortable with our own choices. And I think it secretly makes us feel better to focus on somebody else. I don’t care who you are (yes, I’m talking to you, Gwyneth Paltrow) – when you’re a mom, you’re constantly second-guessing yourself. You worry about tests and schoolwork, if you packed the right lunches and whether your kids are wearing clean underwear.
The tax part? That should be the least of your worries and not a determining factor as to how you raise your kids. But that’s not how our tax policy works in today’s economic and political climate.
Maybe someday, we’ll get it right so that the question of whether to work and how much to be work is settled over the family table. Not in the White House. Not in Congress. And certainly not over a 1040.