Flexible Spending Accounts
What's better for me, the Dependent Care FSA or the Federal Child and Dependent Care Tax Credit?
If you enroll in the Dependent Care FSA you are not eligible to claim a tax credit for the same expenses on your income tax return. In some cases, it may be more favorable for you to take the credit than to participate in a Dependent Care FSA.
Beginning with 2003, the level at which the tax credit versus the FSA provided the same approximate benefit for a family with 2 or more dependents with $5,000 or more in dependent care expenses was an adjusted gross income (AGI) of around $40,000. Over $40,000 and the FSA is typically more beneficial and under $40,000 the tax credit is more beneficial.
The same general rule applies to individuals with 1 eligible dependent and dependent care expenses of $3,000. Again if AGI is over $40,000 the FSA is typically more beneficial and under $40,000 the tax credit is more beneficial.
However, in the case where there is 1 dependent and expenses are in excess of $3,000 the Dependent Care FSA is typically more beneficial no matter what the income level.
In some limited cases you may be able to use a combination of the tax credit and a Dependent Care FSA.
Please Note: The information presented above provides some general rules for illustrative purposes This information does not substitute for personalized professional tax advice. Please consult your tax advisor regarding your own personal situation and what course of action may be better for you.
For further information regarding the Child and Dependent Care Credit please refer to IRS Publication 503 which explains the tax credit in detail. A copy of this publication is available by calling the IRS Forms Distribution Center at 1-800-TAX-FORM (1-800-829-3676) , or on the web at www.irs.gov.
View additional questions:
- What is a Flexible Spending Account (FSA)?
- How much can I contribute to each account?
- What expenses are reimbursable under each of the plan?
- How do I enroll in a Medical Care or Dependent Care FSA?
- Do I have to participate in my employer's medical insurance plan to enroll in the Medical Care FSA?
- What's better for me, the Dependent Care FSA or the Federal Dependent Care Tax Credit?
- Can I change my Medical Care or Dependent Care election at any time?
- When can I submit a claim for reimbursement?
- How do I submit a claim for reimbursement of my expenses?
- What happens if I terminate employment during the year?
- What happens if my expenses are lower than anticipated?
- Are there any filing requirements at the end of the year when I file for my income taxes?