Childcare is one of the most expensive components in any families budget, so take a sec to document childcare costs. It can have a huge impact on your taxes and your financial wellness after divorce.
On the tax side, almost every family – whether single mom or blended or traditional – qualifies for some portion of the child care tax credit. It’s calculated on a sliding scale, and starts with documentation of your child care costs.
On the divorce side, child support calculations vary dramatically from state to state, but many of them take into account how you document childcare costs. This is especially true for families that need full-time care, have a child with special needs or high medical expenses, or if the custodial parent makes substantially less than the other parent.
Anddd… because taxes and divorce are SO FUN, we’re going to make this easy.
What is the Child Care Tax Credit?
If you work or are looking for work, and pay someone to care for your children, this tax credit can get you anywhere from 20% to 35% off childcare expenses with proper documentation. It is super easy to claim with every piece of tax software I have touched.
The Quick Way to Document Childcare Costs for the Tax Credit
You’ve probably heard jokes about people bringing a shoebox full of receipts to their accountant at tax time.
Guess, what? Not a joke!
My tax clients often overestimate – in terror – how formal and detailed their childcare documentation needs to be. Remember that a shoebox full of receipts is perfectly fine for the IRS. I recommend just keeping receipts in a file, whether that’s a virtual in your inbox or printed out on paper. You can also just make a list to document childcare costs, for instance if you pay via Venmo. Note the dates of payment and the amounts paid. You can literally write it on a piece of paper. That’s it.
Childcare Tax Credit – A Really Important Note
One piece of documentation you will need to claim the childcare tax credit: the Social Security Number or EIN of your child care provider. For established businesses, you can just ask for their EIN.
However, for private and informal nanny arrangements, if you declare them for the credit, they also need to report the income you pay them. The vast majority of nannies are paid under the table and many are undocumented. To protect these (mostly) women, you should discuss with them their preference before declaring their income to the IRS.
I’m not going to dive into the whole thing on nanny taxation, but I feel strongly that the shadow market of childcare is the only thing between womankind and armageddon and that tax decisions should rest with the caregiver. Let me know if you want me to expound: claire@askflossie.
Should You Document Childcare Before Divorcing?
Absolutely document childcare costs if you’re in the process of separating or thinking about it. Aside from the tax benefit, this documentation may help provide the court with inputs to the child support calculation.
Even though the court researches finances carefully, getting everything documented now is going to help you down the line. Starting early will help your conversations with your divorce lawyer.
What Childcare Costs to Document
Again, it varies state-by state, but most states want you to document childcare costs related to work, job training or education. You may have to demonstrate that this work benefits the kid.
In some states, like California, the court is required to include documented child care costs in the child support calculation.
Don’t forget to include after-school programs, day camps, etc. related to work. I have seen some guidance that after school programs are not considered childcare by some tax professionals (ex. whoever wrote my taxation course for CFP certification) and I cannot disagree more ardently. After school programs are CRITICAL childcare for Moms, especially in the summer when schooldays are shorter. I would LOVE to share my sword of righteous indignation with an IRS auditor on this one.
How to Document Childcare Costs – The Easy Way
Much like the tax scenario, you don’t have to over rotate here. Simple, consistent, and not creative record keeping will cover what the courts, the ex and your sanity require. How to make it easy?
Joint Account with The Ex for Child-Related Expenses
Might sound crazy, but you can think of a joint account for kid expenses as an informal “flex spending account” or “health savings account” but with less government regulation. The idea is you and your ex agree on what expenses can come out of that account, and how much one or both of you will contribute each month. Since you both have access, there’s a lot of transparency.
Budgeting Software to Document Childcare Costs
Documenting childcare costs is actually a GREAT use for budgeting software like Mint or Personal Capital. You can categorize all your child-related spending, childcare and otherwise, and provide reports to yourself, your ex, your lawyer, etc.
Shoebox O’ Receipts Strikes Again!
If your childcare center uses an App like Hi Mama or ProCare, their records work great. Consider downloading or printing your own copies as backups for your shoebox. Emailed or mailed receipts, or even a paper statement from the program or school works well. Just write it down somewhere.
Staying financially organized is child protection. If you’re feeling like channeling your inner Marie Kondo to tidy up your family finances, check out these tips on Single Mom Money.
AskFlossie is here for all things death, divorce and taxes – even generational wealth for single moms. We are not shy! You might like our recent overview of tax filing statuses for women, which touches on some topics for custodial single moms. And sign up for access to the AskFlossie community, for free, trusted advice for all women.