Saving On Childcare: FSA vs Child Care Tax Credit
No matter where you live, or where you work, we can all agree on one thing — child (or dependent!) care can be seriously expensive. From day care and after school care to help around the house, it’s not long before the bills start piling up. Luckily, there are several tax benefits programs designed to help working providers afford child and dependent care. But what kinds of programs are out there, and what do they have to offer? Here, we will be discussing dependent care FSAs, and child and dependent care tax credits, both of which are tax-benefits programs that can help you seriously save on your dependent care expenses. Read on to find a brief summary of both programs, and to find out which program is best for you: Dependent Care FSA A dependent care FSA is a tax-advantaged plan that many employers offer, which allows employees to allocate pre-tax dollars towards eligible dependent care expenses. As we explained in our discussion on how to budget your FSA, these programs work by allowing you to allocate a certain amount of money at the beginning of each year, which will then be deducted pre-tax from your paycheck. The contribution limit for a dependent care FSA is $5,000 per year if you are filing by yourself, or jointly with your spouse. If you are married and filing separately, that’s reduced to $2,500 for each party. In case you’re wondering, the following claimants can be considered “dependents”:
A child (or children) under 13 years of age
A spouse who requires care
A parent or other tax dependent (including children over 13) who are incapable of caring for themselves
As far as eligibility goes, the purpose of this program is to help people afford the dependent care costs that allow them to work full-time, so most eligible expenses are those that are interrelated to your ability to work. Here are some examples:
- Before/after school programs - Overnight camps - Preschool - Kindergarten (some exceptions) - Summer camp (day camp) - Private school tuition - Daycare (adult or child) - Housekeeping
Child and Dependent Care Tax Credit
In regards to eligible expenses, the child and dependent care tax credit is more or less the exact same as a dependent care FSA. Unlike the dependent care FSA, however, you don’t need to apply for it through an employer — so those who don’t qualify for an FSA (part time employees, etc.) can still take advantage of this tax benefits program.
There are, however, some big difference between the two benefits programs. Whereas an FSA allows you to allocate money from your taxable income, meaning that the more you earn, the more you save, the tax credit is simply a percentage of your expense, and actually decreases with a higher income.
For example: for incomes up to $15,000, the credit starts at 35%, but for income over $43,000, it is lowered to 20%. The tax credit is also capped at $3,000 for one dependent, and $6,000 for two, and cannot be higher than the annual income of the lowest earning spouse. So if you make $43,000/year, but your spouse only made $1,000 last year, $1,000 credit would be your maximum.
Which Option is Best for You?
When weighing which option is best for you, it’s important to remember that both benefits programs will have their pros and cons. If you’re wondering whether it’s possible to take advantage of both programs, the answer is yes — but only under very particular circumstances. For example, if you have hit the $5,000 limit on your FSA, and your expenses meet or exceed the $6,000 child and dependent care credit cap, you can take advantage of both — but you can’t use both tax breaks on the same expenses.
Realistically, though, you will probably have to choose one or the other — and that decision comes down to income, accessibility, and ease of use. If your income is $43,000+, the FSA program will provide more savings. If, however, your employer doesn’t offer an FSA program, the child and dependent care credit is for you.
If you have any questions how you can take advantage of these and other tax benefits, feel free to reach out to us at firstname.lastname@example.org.