Question: My wife and I are expecting our first child later this year and I have been budgeting to see what we can afford for child care. It looks like the average cost of childcare is ~$1000-$1200/month. This is a huge expense for us that we did not have before. We cannot afford to have either myself or my wife take care of the child instead of working so we must use a daycare.

I have a budget and we save ~$1700/mo without spending anything on things like dinners out, movies, tools for the house, etc.

I am not willing to forgo our decent chunk of savings each month to pay for child care as only saving ~$500/mo scares me. 

We bought a house last year and we were wondering what kind of benefit we would see around Tax time for: 1) Living in our own house for (1,2,3...) year(s), 2) Having a child. I know I can increase the number of depends on my tax forms once the child is born, what should I expect in my paycheck once that happens? 

I have a car payment and I was hoping to pay that off as fast as possible to try to get rid of some debt to increase our cushion a little. 

1. Is there anything else I can be doing?
2. What kind of return will I see from renting vs owning for a year(2, 3..)
3. How will my income change once i claim another dependent?

thanks,

Answer: 
I feel like you're getting overwhelmed with all of the variables and possible scenarios and are trying too hard to optimize your taxes and budget. I would suggest simplifying things and not trying to polish too much.

When expecting a child or any other significant life changing event, it is often wise (and helpful emotionally) to save up as much cash as possible in the event that things do not go as planned. Yes, you could reduce your withholding in preparation of a lower tax bill due to an extra dependent, but you won't know *exactly* how much that impact will be until you file your taxes, so I would not decrease them *too* much until you have a better understanding of what expenses will be deductible or what tax credits you will be eligible for.

If it were me, I would put as much of the $1,700 per month in something relatively safe and liquid (e.g. not bitcoin or single stocks, *maybe* a 6-month CD or low-risk mutual fund, but not something that's going to freak you out by losing 10% of its value). 

When the baby comes, if something unexpected were to occur (medical bills, etc.) you have the reserves to cover it without panicking and making an unwise decision out of fear. If *nothing* goes wrong - GREAT! you have reserves that can be used to pay off the car, or pay down the mortgage or other debts. 

Come tax time, You will likely have a decent refund that can ALSO be used to improve your situation. You can also adjust your withholding if you want to realize the tax savings throughout the year instead of getting a large refund.

Now, for the daycare expense. If you cannot afford for one of you to stay at home, then you have an expense that you need to plan for. I realize that tapping into your savings budget is disheartening, but you have three options:

* Increase income (or sell stuff)
* Reduce daycare expenses (finding someplace cheaper? getting help from friends?)
* Reduce other expenses (or savings)

Mathematically, there's really not another way around that.
If your employer offers a FSA (flexible spending account) benefit, you can put up to $5000 per year pretax into this account and use it for child care expenses. It is worth noting that the birth or adoption of a child is one of the life events that should allow a change in your benefits. 

If your employer doesn't offer this, there is a [corresponding credit](https://www.irs.gov/pub/irs-pdf/p503.pdf) you can use on your return, but there's more calculations and paperwork for you involved in this path - if you aren't covered by an employer's FSA there is a max() function on several calculations depending on your gross level of income, you can claim the credit on 35% to 20% of the total expense, or an absolute maximum cap of $5000. I also do not know if this is changed by the 2018 tax bill (the internet suggests employer FSAs are unchanged)

Daycare cost for "infants" (6 weeks to half year) in my area tends to be a few hundred higher per month than toddlers and older; if you and your wife have enough vacation time, sick time, nearby grandparents, FMLA, etc. to plan for 6 months of coverage, you can get into the cheaper window before paying for external daycare.