Flexible Spending Accounts, and Child Care questions

Thundyrkatz

Hey, looking for some advice from anyone who has tried this.

Currently my wife & I are paying a lot of money for Child care because apparently its looked down upon to crate your child! ...go figure.

Anyway, I am looking at 2 options to lower my taxes and save some cash.

1. An FSA plan allows you to reimburse yourself for up to $5,000 of daycare expenses, deducted from your paycheck pre-tax.

2. You can claim up to 20% to 35% (for me it would be 20%) of $3,000 in child care expenses as a tax credit when you file your return.

Daycare expense for me are a bit over $15,000 per year.

So, from what I understand you can't double dip, which is understandable. But here is my question... the amount I pay is way more then both of those combined. So, can I claim option 1 on the first 5k and option 2 on the second 3k?

Thanks in advance for your help!

bowen

I think you can use both, but not for the same expenses.

A little googling suggests this.

Daenris

as far as I can tell yes, you can take the 5000 through a childcare flex account and then claim the tax credit on costs over that. at least I hope that's correct as it's what I did on my last tax return and the online system didn't complain that I couldn't take both.

Thundyrkatz

ah first hand evidence! excellent, thanks Daenris Also glad to see i am not alone in spending a fortune on childcare... misery loves company!

bowen

$290 (min wage x 40) a week childcare (totally reasonable for 1-2 kids not being in a dump hole) would put you at ~$15,000 a year. So no, you're not alone there. Not even by a longshot.

zagdrob

Child care is miserably expensive. Like, we pay as much for three day a week care for our three year old as we pay for our mortgage (P&I)...and it's going up next month. Can not WAIT for kindergarten to start, they are talking about going year-round and full-day kindergarten formats in our district so...fingers crossed.

Anyway though...it can depend on income, but if you're paying $15,000 / year and it's available, there is almost certainly no reason not to have the Dependent Care FSA and max it out each year. That knocks your taxable income down $2500 single or $5000 married and depending on where you are at income / deduction-wise may qualify you for / increase other credits.

With the Child / Dependent Tax Credit, if your taxable income is over $43,000, the most you can claim filing jointly is 20% of $6000 of expenses (separate from the FSA expenses) - so $1200. If you're in the 25% bracket and ONLY had $5000 in qualified expenses it's still better to use the FSA, because it's immediately $250 more in tax savings over using that $5000 for the Credit.

EDIT - so anyway, yes - you can use the first $5000 for the FSA, and the next $6000 for the Credit. Depending on you and your wife's income, that'll land you $2450 in immediate tax savings (plus likely a few extra bucks in other deductions / credits, and possibly in state taxes), which...at least lessens the pain of paying $TEXAS each year for child care a bit.

Thundyrkatz

Nice, thanks for breaking it down for me like that Zagdrop!

We only have the one so far in daycare, maybe a 2nd kid down the road to extend the poverty. It will be like a raise when they finally start school which is just so far away at this point. Its actually kind of crazy how much it costs, almost more then going to college.

But thanks again guys, nice to know i can save a few bucks on the taxes at least!

zagdrob

If you've only got one kid that you are paying for, the FSA is even more beneficial. I'm assuming you are at least 25% tax bracket if you're paying $15 large annually for child care.

You can only get the 'full' Child Care Tax Credit if you have two (or more) kids. One kid gets half the credit of two or more, so you would (probably) only get $600 back. With a FSA, you can (married, filing jointly) automatically withdraw the full $5000.

There might be some very, very low income levels where the Child Care Tax Credit is more beneficial than the FSA, and you do have more flexibility with the Tax Credit (FSA is 'use it or lose it' at the end of the year) but for almost anyone who pays for child care maxing out their FSA is one of the easiest and most beneficial things they can do taxwise.

It's getting a bit OT, but I would like to see a 'Care Savings Account' that works like an HSA or 401k where you can deduct money that rolls over year to year. It would be very nice for people who don't have kids cushioning their future child care expenses, and even if they don't have kids it could go for their care later in life or the care of an elderly parent. A bunch of my co-workers are dealing with their parents going into homes (one home around here is $8,000 / MONTH) and having some money saved up over the years for that would be pretty helpful for those expenses. I'd do a grand or two a year to lower my tax liability...