Millennial Money: 4 expenses for parents to rethink in 2023
When inflation rises, child care expenses do, too. If you’re a parent, you may be hoping to get a little financial relief during the upcoming tax season through deductions or credits. But since there have been recent reductions to both of the child tax credits, you may not get as much back as you anticipated.
If you’re like me, you could end up paying the IRS instead of getting a refund from Uncle Sam. To help your money go further in 2023, you may want to reevaluate some of your recurring child-related expenses. Here are a few strategies for reducing costs, according to finance professionals.
Many of the increased tax credits and deductions parents enjoyed during the height of the pandemic are reverting to their original limits. As a result, parents should be prepared to get less back this year, says Alton Bell II, principal accountant and founder at Bell Tax Accountants & Advisors in Chicago.
“I would prepare for a tax refund reduction shock because the credit around the dependent care has significantly changed,” he says.
In 2021, the child and dependent care credit increased to make child care more affordable for working parents. It was raised to a maximum of $4,000 for one qualifying person and $8,000 for two or more qualifying persons, and potentially refundable. For 2022, the amount has gone back down to a maximum of $1,050 for one qualifying person and $2,100 for two or more. Additionally, the child tax credit is reverting to $2,000 for children of all ages for the 2022 tax year. For 2021, it increased to $3,600 for children under six and $3,000 for kids ages 6 to 17.
With these cuts in mind, I thought it might be a good idea to ditch aftercare for my 5-year-old son this year. My living room may look like the scene of a volcanic eruption more often, but I’ll save $200 a month. If you work remotely and can handle having your child home a few extra hours during the day, consider giving this a test run.
Additionally, you could contribute to a dependent care flexible savings account, which allows you to use pre-tax dollars to pay for child care. Bell suggests maxing out that account for the year and also utilizing an employer FSA match if your company offers one.
You can contribute $ 5,000 per household to a dependent care FSA in 2023, or $2,500 if you’re married filing separately.
If your snack cupboard is empty within three to five business days because your kids have bottomless bellies, then you may be looking for ways to reduce your grocery bill. This may especially be the case if you’re feeling the effects of higher food costs due to inflation.
One cost-saving strategy is to plan your shopping ahead of time to avoid buying items you don’t need. Dominique Broadway, a personal finance expert and founder of Finances Demystified in Miami, Florida, switched from going to the store to using grocery delivery services so she knows exactly how much she’ll spend.
Broadway also recommends putting the same groceries in different delivery service provider carts so you can do a side-by-side comparison of the price difference.
“You’ll be surprised, the difference can be pretty large — sometimes 40, 50 bucks difference just because of delivery fees and the inflated prices. Over time that actually does add up,” she says.
Premiums can become a noticeable expense when you pay them monthly. Adding copays every time you visit the doctor increases your out-of-pocket costs even more.
If you have a relatively healthy child and can say the same for yourself, think about whether a health savings account could save you money. HSAs can be used to pay health care expenses. The limit for HSAs in 2023 is $3,850 for individuals and $7,750 for families. The contributions are made with pre-tax dollars and are also tax-deductible. You must have a high-deductible health insurance plan to contribute to an HSA. High-deductible health plans sometimes have lower premiums, which leads to some people saving money. Keep in mind that with these plans, you may end up paying a higher deductible before your insurance starts sharing health care costs with you.
I decided to give it a test run in 2022. Since my son and I went to the doctor a handful of times that year, my out-of-pocket costs came to just about $700. The cherry on top is I had $1,500 left over thanks to my employer’s contributions to my HSA account. I can now roll that money over into the new year.
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There were so many toys in my house by the end of 2022 that my son and I gave half away. This year, I’m cutting costs by making better use of free activities.
Oftentimes, parents buy children items, only to realize what they really value is experiences, Broadway says.
“I’ve purchased a $3 activity kit from Target and gotten hours of fun and play with my children out of something like that versus just buying them a bunch of toys,” she says. “I think that alone is a great way to cut costs and build a better relationship with your children and make more memories with them, as well.”
Speaking of experiences, there is a trampoline park near our house that offers a $20 monthly subscription for endless play. It seems more cost-effective to take my son there than to buy more trucks and excavators I’ll end up tripping over.
If any of these strategies lead to savings this year, Broadway suggests investing the money in a custodial account for child-related future expenses and to help your kids build wealth.
“Take that money and invest it for your children — have it working for you and for them.