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.
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 2013, the maximum tax-free amount is $5,000. Married individuals filing separate returns have a reduced limit of $2,500 each. 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 -- 20 percent to 35 percent. The percentage you can get back depends on your adjusted gross income. People earning more than $43,000 are eligible for 20 percent of eligible expenses. 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.
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.
- Kiplinger: FSA or Child-Care Credit?
- BabyCenter: Tax Time – Flexible Spending Plans Versus the Childcare Credit
- The Federal FSA Program: Dependent Care Tax Credit Worksheet
- MarketWatch: Child-Care Tax Breaks for Working Parents
- Aetna: Dependent Care FSA
- Internal Revenue Service: Child and Dependent Care Expenses
- Internal Revenue Service: Publication 15-B (2013)
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