FSA or Child-Care Credit?
There is a way to benefit from both options if you have two or more children.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter
I have to make choices about my employee benefits during this year’s open-enrollment season. Is it better to pay for child-care expenses from a flexible spending account or to take the child-care tax credit?
If your employer offers a dependent-care flex plan, that’s usually a better deal than taking the child-care tax credit. Money you set aside in a flexible spending account is not only deducted from your gross salary before income taxes are calculated but also avoids the 7.65% Social Security and Medicare tax. So if you’re in the 15% income-tax bracket, contributing $5,000 to your flex plan (the maximum for most employers’ plans) would cut your federal income-tax bill by $1,133 next year. The benefits get better as your tax bracket rises, and you’ll save even more if your FSA contribution escapes state income taxes, too.
The dependent-care tax credit can help if you don’t have an FSA at work. It’s most valuable for people with very low incomes. To qualify, you must pay someone to watch a child who is younger than 13 so that you can work or look for work. Both spouses must have earnings from a job or self-employment, unless one is a full-time student. You can take a tax credit worth 20% to 35% of the cost of care, up to $3,000 for one child or up to $6,000 for two or more children. The higher your income, the lower the credit, bottoming out at 20% for those who earn $43,000 or more. The 20% credit would cut your tax bill by $1,000 if you pay $5,000 in child-care expenses for two kids.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But there is a way to benefit from both options: If you have two or more children and your child-care expenses exceed $5,000 per year, you can set aside up to $5,000 in pretax money in your FSA, then claim the dependent-care credit for up to $1,000 in additional expenses.
For more information about the child-care tax credit, see FAQs on the Child Care Tax Credit (opens in new tab).
As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.
-
-
Legalized Weed Sales Begin in Missouri: This Week in Cannabis Investing
The Show Me State legalized recreational weed in 2022, with sales officially underway as of last Friday.
By Morgan Paxhia • Published
-
Four Steps to Financial Wellness for Black History Month
The small financial steps you take today, such as showing yourself empathy and building credit and savings, can add up to help you create a better tomorrow.
By Aaron Harding, CFP® • Published
-
It’s Not Too Late to Boost Retirement Savings for 2018
retirement Some retirement accounts will accept contributions for 2018 up until the April tax deadline.
By Kimberly Lankford • Published
-
How to Correct a Mistake on Your RMDs from IRAs
retirement If you didn't take out the correct required minimum distribution because your brokerage firm made a mistake, the IRS may show some leniency.
By Kimberly Lankford • Published
-
Ways to Spend Your Flexible Spending Account Money by March 15 Deadline
spending Many workers will be hitting the drugstore in the next few days to use up leftover flexible spending account money from 2018 so they don’t lose it.
By Kimberly Lankford • Published
-
Making the Most of a Health Savings Account Once You Turn Age 65
Making Your Money Last You’ll face a stiff penalty and taxes if you tap your health savings account for non-medical expenses before the age of 65. After that, the rules change.
By Kimberly Lankford • Published
-
Reporting Charitable IRA Distributions on Tax Returns Can Be Confusing
IRAs Taxpayers need to be careful when reporting charitable gifts from their IRA on their tax returns, or they may end up overpaying Uncle Sam.
By Kimberly Lankford • Published
-
When You Can Expect to Receive Your Tax Refund
taxes The quickest way to receive your tax refund is to file electronically and have the money directly deposited into your bank account.
By Kimberly Lankford • Published
-
How a Move Can Change Your 529 Plan Tax Deduction
529 Plans The tax deduction you get for contributing to your state’s 529 plan can disappear if you move to another state.
By Kimberly Lankford • Published
-
Tap an IRA Tax-Free With an HSA Rollover
IRAs You can convert tax-deferred money in a traditional IRA into tax-free cash by rolling it over to a health savings account and using it to pay for medical bills.
By Kimberly Lankford • Published