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To help you work and earn an income on which you pay taxes, the U.S. government allows you to get some tax help for expenses that you pay for care for dependent children so that you, and your spouse if you are married, can work. The dependent care credit is a direct, dollar-for-dollar credit toward taxes that you owe for the year. A dependent care reimbursement account is a flexible spending account allowing you to set aside pre-tax money to pay child care expenses.
Your dependent-care credit is based on your adjusted gross income, and is figured based on a sliding scale. As of 2013, if your adjusted gross income is $15,000 or less, your credit is calculated at 35 percent of your child care expenses, up to a maximum of $3,000 for one child or $6,000 for two or more children. The percentage of credit allowed drops as your adjusted gross income rises. The lowest possible percentage of expenses allowed as a credit is 20 percent of expenses if your adjusted gross income rises above $43,000.
Your flexible spending plan, which reimburses you for your child care expenses, is an employee benefit. If your employer does not offer this plan, you cannot take advantage of the benefits it offers. You can take advantage of the dependent care credit regardless of your employer, and the types of benefits that it offers. You also do not have to work with a third party administrator to be certain that the benefits are paid out correctly.
The dependent care credit is a great way to accumulate your receipts throughout the year, and just before you file your taxes, you can total what you have spent on child care, then claim the credit. The dependent care reimbursement account reduces your before-tax income, as the money is taken from the account before your employer calculates your withholding. In addition, the amounts withheld for a dependent account reduce your Social Security due to this reduction in before-tax income.
With a flexible spending account through your employer, the most you can put away in any one year is $5,000 for dependent care expenses. When taking advantage of the tax credit, you can take a partial credit for up to $3,000 in expenses for a single child, or up to $6,000 with two or more children. This higher maximum could work to your advantage if you spend more than $5,000 per year in child care expenses for two or more children.
You can use both types of assistance with child care expenses. You cannot claim a credit for any amount that was paid through an employer reimbursement benefit, or a flexible spending account. However, any amount that you pay that is in excess of what you pay through a flexible spending account, up to the allowable maximum, is eligible for the tax credit. For example, if you have your employer deposit $2,000 into your flexible account for child care expenses, and the expense total $6,000 for two children, you can claim a credit up to your eligible percentage for the $4,000 in additional expenses that were not paid through the flexible spending account.