Author Topic: Daycare FSA  (Read 3156 times)

texaslady22

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Daycare FSA
« on: August 03, 2015, 11:03:00 PM »
I've never had a daycare FSA, but I've been doing the research and it seems like the thing to do. The way I understand it, I can only deduct 3,000 for my one child if I itemize. If I do the FSA, I can put up the 5K pre-tax.

My daughter's preschool is 5,500 a year, so what's the best choice for me?

(We're moving her from a school that costs $90 to one that costs $150 a week. She's been on the waiting list for six months. Sometimes, you get what you pay for).

MDM

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Re: Daycare FSA
« Reply #1 on: August 03, 2015, 11:35:01 PM »
If 2015 is looking close to 2014 for you, going back to your 2014 return and evaluating both options may be the best approach.

Or, based on the OP and http://forum.mrmoneymustache.com/taxes/best-paycheckwithholding-calculator(s)/msg726237/#msg726237, perhaps Taxcaster will work if you don't have access to a full tax software package.

forummm

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Re: Daycare FSA
« Reply #2 on: August 04, 2015, 06:00:06 AM »
I have this issue coming up. I think you mean the appropriate comparison is the FSA vs the Dependent Care Tax Credit. Generally, the more you earn, the better the FSA is in comparison. The FSA (at least from what I've read) isn't just exempt from income taxes, it's also exempt from FICA. These were the best calculators and info sources I found comparing the 2. The big caveat with FSA is that you lose whatever you don't spend. But spending $5k on your kid's qualifying expenses is pretty easy.

https://www.askallegiance.com/OnlineServices/FlexTaxCalculator/DependentCare/
https://www.fsafeds.com/forms/dcfsa_worksheet.pdf
http://www.babycenter.com/0_tax-time-flexible-spending-plans-versus-the-childcare-credit_3651253.bc

krishnamba

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Re: Daycare FSA
« Reply #3 on: August 04, 2015, 09:35:04 AM »
from what I know the credit means if you owe 5,000 in taxes you can subtract 3,000.

The fsa is a deduction. Meaning it adjusts you agi. So if you made 50,000 you could subtract 5,000 and pay taxes on 45,000.

I'm a red panda

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Re: Daycare FSA
« Reply #4 on: August 04, 2015, 10:06:17 AM »
Is it a rebatable credit?  (So if you owe less taxes than the credit, do you get cash back?)


If you use an FSA, and you don't pay SS taxes on that amount; does that in effect adjust the income you earned, and have the effect of reducing later SS payments?

forummm

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Re: Daycare FSA
« Reply #5 on: August 04, 2015, 11:28:42 AM »
If you use an FSA, and you don't pay SS taxes on that amount; does that in effect adjust the income you earned, and have the effect of reducing later SS payments?

Yes, later SS payments will be imperceptibly reduced. $5k is not that much in the context of lifetime earnings.

Pooplips

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Re: Daycare FSA
« Reply #6 on: August 04, 2015, 11:40:36 AM »
If you use an FSA, and you don't pay SS taxes on that amount; does that in effect adjust the income you earned, and have the effect of reducing later SS payments?

Yes, later SS payments will be imperceptibly reduced. $5k is not that much in the context of lifetime earnings.

Plus your kids are not in daycare forever. My wife and I use and fsa, works great.

Proud Foot

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Re: Daycare FSA
« Reply #7 on: August 04, 2015, 11:50:20 AM »
TexasLady22,

I use the Daycare FSA for my child and have maxed it out for this year.  I calculated that it will save me around $1,100 more in taxes more than taking the deduction. In addition to this my opinion is that the Daycare FSA is better than the credit because the credit is not refundable. Also because of how the credit is set up, you would need to have over $8,500 - $15,000 in daycare expenses for the year to receive the full $3,000 credit (2014 numbers).

I'm a red panda

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Re: Daycare FSA
« Reply #8 on: August 04, 2015, 12:24:32 PM »
If you use an FSA, and you don't pay SS taxes on that amount; does that in effect adjust the income you earned, and have the effect of reducing later SS payments?

Yes, later SS payments will be imperceptibly reduced. $5k is not that much in the context of lifetime earnings.

No, $5k isn't much. (Especially since when I start using this account next year $5k won't even cover half of the daycare costs!)

I'm just trying to understand how an FSA effects various things.

KCM5

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Re: Daycare FSA
« Reply #9 on: August 04, 2015, 12:29:55 PM »
The child tax credit can only be 20-35% of $3000 or $600-$1050/yr at best. The flex spending account reduces SS/Medicare (7.65%) and your tax rate. So if you're in the 15% bracket you'll save 22.65% or $1132. And it reduces your AGI so you may be eligible for something you wouldn't be otherwise, like the Savers Credit or something.

KCM5

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Re: Daycare FSA
« Reply #10 on: August 04, 2015, 12:31:43 PM »
Oh, also I wanted to mention that if you have two kids, even if the other child doesn't use the childcare (the IRS is specific about this), you can use $1000 of the  dependent care tax credit on top of the $5k flex spending account. So keep this in mind.