Tax Breaks, Child Care, Flexible Spending Accounts

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Tax Breaks for Child Care: Flexible Spending Accounts vs. Tax Credits

The higher your income, the better the FSA looks.


QIt's open enrollment for my 2017 employee benefits, and my employer is offering a dependent-care flexible-spending account. Would I get a bigger break for my toddlers' day-care costs with the FSA or by taking the child-care credit on my income tax return?

AYou'll generally get a bigger break with the FSA, especially as your income rises.

You can set aside up to $5,000 pretax in a dependent-care FSA, if one is offered by your employer. That money avoids not only federal income taxes but also the 7.65% Social Security and Medicare tax, and it may bypass state income taxes as well. If you're in the 25% federal income tax bracket and pay 5% in state taxes, for example, contributing $5,000 to an FSA would save you $1,883 in taxes. The higher your tax bracket, the bigger the benefit. (The maximum contribution is $5,000 per household each year even if both spouses have access to a dependent-care FSA where they work.)

SEE ALSO: Most-Overlooked Tax Breaks for New Parents

The dependent-care tax credit, on the other hand, is worth 20% to 35% of up to $3,000 in eligible child-care expenses if you have one child, or up to $6,000 if you have two or more children. The percentage is based on your income; you'll qualify for the 35% credit only if your income is $15,000 or lower. If your income is $43,000 or more, the credit is worth 20% of eligible child-care expenses, with a maximum credit of $600 if you have one child or $1,200 if you have two or more children. See IRS Publication 503, Child and Dependent Care Expenses, for a list of credits at each income level.


You can't double dip, so you can't use the FSA and take the full dependent-care credit. But families with two or more eligible kids can max out the $5,000 FSA benefit and still take the dependent-care credit for up to $1,000 in eligible child-care expenses, which could cut your tax bill by an extra $200 or more, depending on your income.

Both the dependent-care FSA and the tax credit have the same eligibility requirements: The care must be for a child under age 13 while you and your spouse work (both spouses must have earned income, or one can be a full-time student). The cost of day care, a nanny, a babysitter and preschool counts (but not the cost of school for children in kindergarten or higher grades). You can also count the cost of before-school or after-school care and day camp (but not overnight camp) during the summer and school breaks.

SEE ALSO: How to Change Dependent-Care FSA Contributions Midyear

Certain expenses for an elderly relative who is your dependent (such as the cost to attend an adult day-care center) may be eligible for the dependent-care FSA or tax credit, too. See Dependent-Care Flexible Spending Accounts Aren't Just for Kids' Expenses for more information about those rules.

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