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Dependant Care Credit vs. FSA

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CourtClerk

Senior Member
What is the name of your state? CA

Specifically for LD, cbg and Jetx, but any other tax specialists are welcome to reply.

Here's the deal. The court system has recently negotiated into our new contract (effective 2008) that the county will now, based on your income contribute a set amount of money into a flexible spending account for dependant care expenses as long as you contribute a nominal amount of money (something like a minimum of $10/mo). I am considering taking this option, however, I need to figure out what the better tax benefit is for me in the long run before I do. Open enrollment is in October, so I need to make the decision for 2008 in a few weeks.

Q: I'm almost sure you can't have an FSA and take the dependant care credit at the end of the year both. True?

If true, then considering that with my income I'm looking at a contribution of about $3000/yr., (my child care costs run $5328/yr), wouldn't I get a bigger advantage from using the FSA? I believe the dependant care credit I get on my taxes every year is only several hundred dollars.

I'm sure this can't be this easy to look at, so I'm looking for some insight. I don't itemize and use the standard HOH deduction every year.
 


LdiJ

Senior Member
What is the name of your state? CA

Specifically for LD, cbg and Jetx, but any other tax specialists are welcome to reply.

Here's the deal. The court system has recently negotiated into our new contract (effective 2008) that the county will now, based on your income contribute a set amount of money into a flexible spending account for dependant care expenses as long as you contribute a nominal amount of money (something like a minimum of $10/mo). I am considering taking this option, however, I need to figure out what the better tax benefit is for me in the long run before I do. Open enrollment is in October, so I need to make the decision for 2008 in a few weeks.

Q: I'm almost sure you can't have an FSA and take the dependant care credit at the end of the year both. True?

If true, then considering that with my income I'm looking at a contribution of about $3000/yr., (my child care costs run $5328/yr), wouldn't I get a bigger advantage from using the FSA? I believe the dependant care credit I get on my taxes every year is only several hundred dollars.

I'm sure this can't be this easy to look at, so I'm looking for some insight. I don't itemize and use the standard HOH deduction every year.
It is possible to take advantage of an FSA and still be eligible for a partial Dependent Care Credit. It all depends on your overall situation. An FSA allows you to pay for dependent care with pre tax dollars rather than post tax dollars.

There are some answers here, and some links to more in depth info:

http://www.irs.gov/faqs/faq7-1.html
 
Last edited:

abezon

Senior Member
Grab the money! Here's why:

1. It's free. :D You're getting non-taxable money from your employer to spend on day care. This is like the 401k/403b or whatever retirment plan your employer has where they match your contributions to encourage you to save. It's actually better than a retirment plan, because you don't have to pay tax on the money when it comes out of the FSA.

2. It's better tax-wise. An FSA is usually better than paying post-tax dollars & claiming a dependent care credit. You pay income tax on your wages at 15 or 25 %, then claim a child care credit which is probably between 20 & 30%. You can come out ahead on this calculation, but not by much. It's way better to just get the free money from your employer. You didn't give us your AGI, so we can't get too specific on this.

3. If you're anywhere near a phaseout of anything, diverting some of your wages into a FSA lowers your income, which lowers your taxes & may increase other credits (EIC & education credits can easily be affected). If you claim EIC, you may find that the increase in EIC far exceeds the 'lost' child care credit.

4. You can divert up to $5,000 to a FSA for child care whether you have 1 kid or 2. Given the employer match, this would allow you to pay all your day care expenses with tax-free money. If you claim a day care credit, the credit is based on a maximum day care expense of $3000 for one kid & $6000 for 2 kids. If you have only one kid in day care, note that you could only claim a credit on $3000 of expenses, even though you paid $5300 post-tax dollars. The extra $2300 is not eligible for any credit. :( If you have 2 kids & pay the first $5000 from the FSA account, you still get to claim a child care credit for expenses that exceed $5000 (to a max of $1000). Since that $5000 consists of $2k from you & $3k from the boss, you day care expenses just dropped to $2300.


You might visit your tax preparer with some numbers to see how the scenarios play out. If you used software to do your return, it likely has a tax planning feature that allows you to estimate your taxes for a future year.
 

CourtClerk

Senior Member
Abezon and Ld, thank you...

A couple of more questions...

Grab the money! Here's why:

1. It's free. :D Yeah... this was the part of it that really got me... :)You're getting non-taxable money from your employer to spend on day care. This is like the 401k/403b or whatever retirment plan your employer has where they match your contributions to encourage you to save. It's actually better than a retirment plan, because you don't have to pay tax on the money when it comes out of the FSA.

We have a pension and have the ability to pay into it in order to retire early... I get the idea

2. It's better tax-wise. An FSA is usually better than paying post-tax dollars & claiming a dependent care credit. You pay income tax on your wages at 15 or 25 %, then claim a child care credit which is probably between 20 & 30%. You can come out ahead on this calculation, but not by much. It's way better to just get the free money from your employer. You didn't give us your AGI Between 60 - 70K, so we can't get too specific on this.

Question of the day: Do I have to count the money that the County is contributing as income? In other words, when I see my W2 in 2009, is it going to look like I received a $3000 pay raise? I only plan on contributing about $10/mo because with the contribution from the county and a transfer I got effective Monday, I don't need before and after school care anymore. Just after school. Lowers my child care bill (1 child) to about $222/mo.

3. If you're anywhere near a phaseout of anything, diverting some of your wages into a FSA lowers your income, which lowers your taxes & may increase other credits (EIC & education credits can easily be affected). If you claim EIC, you may find that the increase in EIC far exceeds the 'lost' child care credit.

My son will be 12 at the end of the year (new years eve eve baby...LOL) So (I believe) at 13, there is no more care, however, I will continue to put him in an afterschool program somewhere...

4. You can divert up to $5,000 to a FSA for child care whether you have 1 kid or 2. Given the employer match, this would allow you to pay all your day care expenses with tax-free money.THIS IS WHAT I'M HOPING!!!!! If you claim a day care credit, the credit is based on a maximum day care expense of $3000 for one kid & $6000 for 2 kids. If you have only one kid in day care, note that you could only claim a credit on $3000 of expenses, even though you paid $5300 post-tax dollars. The extra $2300 is not eligible for any credit. :( If you have 2 kids & pay the first $5000 from the FSA account, you still get to claim a child care credit for expenses that exceed $5000 (to a max of $1000). Since that $5000 consists of $2k from you & $3k from the boss, you day care expenses just dropped to $2300.


You might visit your tax preparer with some numbers to see how the scenarios play out. If you used software to do your return, it likely has a tax planning feature that allows you to estimate your taxes for a future year.
I do generally use turbo tax because my taxes tend to be very uncomplicated (nothing I need to pay H&R block $150 to deal with... however, depending on how labor intensive this becomes, I may have to start looking to them again.

Also, any idea how this effects my state taxes??? If it effects it at all?
 

CourtClerk

Senior Member
I agree with abezon. Go with the FSA, especially since your employer will be funding a portion of it!
Shoot, I just found out that I will be transferred immediately (i.e. Monday) to a courthouse about 15 minutes from my house (as opposed to the 1 hour drive I've been doing everyday).... with that, they will be funding ALL of my childcare. Shopping anyone??? :D
 

TinkerBelleLuvr

Senior Member
As for the 3K showing up in box 1 of your w-2 - ASK your employer. They should be able to tell you, but I do not believe so.

As for your child crossing the bridge to 13 - you will no longer be able to have the child care/ dependent claim UNLESS your child is disabled. This deduction is also for spouses, when they work, and their spouse is disabled! I would check into it's availability after the b-day.

I was splendidly delighted when I found out that the Boys & Girls Club was able to take my child on her days off of school. For $50 a YEAR, my pocketbook has been singing. So, Courtclerk, where are we going shopping? Oh - shoot, still paying on my lawyer!
 

abezon

Senior Member
The FSA contribution will not show up in your paycheck. However, unless the funds are used for day care expenses, you lose them at the end of the fiscal year.

Check with benefits administration about whether you may still participate once your son is over 13. Age 13 is the cut off for claiming a day care credit, but is there any requirement that flex spending day care benefits be limited to kids under 13? It may be even more beneficial to participate in the FSA once your kid's 13, since you can't have any kind of tax benefit. Paying the after school care with pretax/free dollars may be the best you can do. Heck, with the FSA benefit, you may even be able to upgrade your son's after school care to something better than youth basketball & lanyards . . . .
 

TinkerBelleLuvr

Senior Member
You have to fill out the Dependent Care Credit form whether you have FSA or not, so if she gets it after son is 12, she may then have to claim it as income.
 

abezon

Senior Member
Good point, Ginny. On the other hand, if Clerk can still get the employer match, it's still a better deal than paying with her own money. Sure she has to pay income tax (but not employment taxes) on the match, but you don't go broke increasing your income by $1000 & your tax by $250. I'll make that trade any day. ;)
 

CourtClerk

Senior Member
The FSA contribution will not show up in your paycheck. However, unless the funds are used for day care expenses, you lose them at the end of the fiscal year.

Check with benefits administration about whether you may still participate once your son is over 13. Age 13 is the cut off for claiming a day care credit, but is there any requirement that flex spending day care benefits be limited to kids under 13? It may be even more beneficial to participate in the FSA once your kid's 13, since you can't have any kind of tax benefit. Paying the after school care with pretax/free dollars may be the best you can do. Heck, with the FSA benefit, you may even be able to upgrade your son's after school care to something better than youth basketball & lanyards . . . .
I am definately going to get in touch with someone in Benefit's Admin. to see if they can give me some info on what happens after 13. He won't turn 13 until the end of 2008, so I have plenty of time. Kiddo goes to the YMCA for care. I like them much better than the Boys & Girls Club, they're summer program (albeit expensive) has all of the costs of the trips (3 -4/ week) included. As for his current after school care.. it consists currently of football, basketball, baseball, karate and the Y's swim team. And if you can believe this... I actually pay ANOTHER BABYSITTER to pick him up from the YMCA to shuttle him to his practices during the week because they all start before I can get to him.

So the saved money will actually help me offset the crazy amount of money I put towards a child who is a sports fanatic. He said don't worry, he's going to make me rich one day :)
 

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