Everyone paying child-care expenses can appreciate the value of shelling out less money. Reclaim part of your paycheck by taking advantage of all the tax benefits you can. A child-care flexible spending account and the child-care tax credit can help reduce some of this financial burden and let you keep more of what you earn.
It is possible to take advantage of both a child-care flexible spending account and a child-care tax credit in situations where your expenses exceed federally mandated thresholds.
Flexible Spending Account
Your employer may offer dependent care benefits by allowing you to use pre-tax dollars to pay for your child care expenses. This arrangement is a flexible spending account that is funded pre-tax contributions, deducted from your pay. For 2018, the maximum tax-free amount is $3,000. Check with your employer for plan-specific rules and how to get reimbursed for child care expenses.
For many people, a FSA has the greatest tax benefit as it also reduces the amount of Social Security and Medicare taxes you pay -- your deductions are made before both of these are taken out of your pay.
Child Care Credit
A dependent child under 13 who attended child care while you earned income, could qualify you for the child care credit. The tax credit you earn is a percentage of the expense you incurred –up to 35 percent. The percentage you can get back depends on your adjusted gross income. However, there is a dollar limit on the amount of child care expense that is eligible for this credit. For one qualifying child, the limit is $3,000; for two or more qualifying children the limit is $6,000.
Comparing Your Benefits
Either option reduces your tax liability. An FSA may result in greater tax savings on the first $5,000 – particularly if you are in a higher tax bracket. However, your employer sets up your FSA and you must request reimbursement for eligible child care expenses as you incur them by filing a FSA reimbursement request form.
This means you might pay for day care out-of-pocket and see a deduction from your paycheck initially. You also lose any remaining balance that is not used during the plan year. The dependent child care credit could be a better option for some people, it is claimed by attaching Internal Revenue Service Form 2441 to your Form 1040 or 1040A.
Claiming Both Credits
While you cannot receive both tax benefits for the same expenses, you may be able to claim both tax benefits if your expenses exceed $5,000. If you have two or more children, you could set aside the first $5,000 pre-tax into an FSA and claim up to $1,000 of remaining expenses for the dependent child-care credit. This means you could potentially collect the higher tax savings allotted through an FSA but not be limited to the FSA's maximum of $5,000.
Sara Mahuron specializes in adult/higher education, parenting, budget travel and personal finance. She earned an M.S. in adult/organizational learning and leadership, as well as an Ed.S. in educational leadership, both from the University of Idaho. Mahuron also holds a B.S. in psychology and a B.A. in international studies-business and economics.