Author Topic: Stimulus - Nix Dependent Care FSA?  (Read 683 times)

Junglebot

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Stimulus - Nix Dependent Care FSA?
« on: March 15, 2021, 12:01:11 PM »
Hi everyone! Iím hoping smart forum folks can help with a question:

We just had a baby and can change benefits as a result. My sleep-deprived reading of the American Rescue Plan Act says it would be better for us to kill the Dependent Care FSA for the rest of 2021 and go for the credit instead.  Is that right?

We should have an agi barely under $150k in 2021. Weíre in the 22% bracket, and will have around $12k of child care expenses for the year for 2 kids.

Credit - up to $16k (so 12k) with a 50% refundable credit (or slightly less if we fail to hit the $150k mark)?
FSA - up to $5k (or 10.5k if my employer expands to match the higher limit) with a 22% deduction

Also, can we use the credit for the amount we pay beyond the $5000 (or less) FSA?

Thanks!

EvenSteven

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #1 on: March 15, 2021, 12:26:11 PM »
I am in a similar situation, but with one kid, and will need to make a decision if my employer actually lets us change our deferrals in light of the new relief bill.

The way I do your math:
Credit (phase out after 125K AGI at 150k AGI should put you around 38% credit): (0.38) (12,000) = $4560
dependent care FSA (including state tax and FICA tax) = [(.22 + .0765 + state tax?) * (10,500)] + [(12,000-10500) * (0.38)] = at least 3683.25, if state tax = 0.
Conclusion: Tax credit is better for you


The way I do my math
Credit: (0.38) (8,000) = 3040
dependent care FSA = (.22 + .0765 + .054) * (10500) = 3680.25
Conclusion: FSA is better for me


I would love it if anyone else would check my math.

Edit: There may be some consideration if you want to keep your AGI under 150K for future or previously missed stimulus money, the FSA is a way to reduce your AGI, and if you spike your FSA, you would be adding on that 5,000 to your AGI.
« Last Edit: March 15, 2021, 12:45:48 PM by EvenSteven »

kpd905

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #2 on: March 16, 2021, 05:53:24 AM »
I am in the process of trying to change my contributions as well, but our HR department says they are still looking into the specifics of the bill.

If I have already contributed $1,000 to the FSA, but then stop contributions, I assume I can still use $7,000 of the $8,000 toward the credit? 

Joel

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #3 on: March 16, 2021, 08:25:08 AM »
Does anyone have a link to the exact details? Iíve been having a hard time understanding the options.

Junglebot

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #4 on: March 16, 2021, 10:06:31 AM »
Thank you! I was definitely forgetting about FICA and state tax (CO, so 4.55% in 2021). I was also missing that phase outs start at $125k. Looks like the credit still comes out ahead for my situation.

Yeah, I was also having a tough time finding the actual language. Hereís a link to the bill:
https://www.congress.gov/bill/117th-congress/house-bill/1319/text#toc-H163A596A7E954C09A3853AA9C47DBF19

And hereís a link to a CRS report which is where Iím now taking my information from:
https://crsreports.congress.gov/product/pdf/R/R46680


chaskavitch

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #5 on: March 16, 2021, 10:39:21 AM »
Wow, I'm glad someone posted about this, I hadn't even seen this change in the bill.  I'm still unsure about the math for my situation, mostly because I have no idea if my company will expand the max.  Thanks for posting examples so I can come back and figure it out once I have more info!

Heroes821

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #6 on: March 18, 2021, 08:25:48 AM »
I'm going to read those links but is there a TLDR, are the new tax credits getting taken away if you use an FSA? You can't do both?

maisymouser

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #7 on: March 18, 2021, 08:31:16 AM »
I'm going to read those links but is there a TLDR, are the new tax credits getting taken away if you use an FSA? You can't do both?

Yes, I am confused too and haven't read up on this. Am pressed for time today but would definitely like some help here.

Heroes821

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #8 on: March 18, 2021, 08:45:28 AM »
I'm going to read those links but is there a TLDR, are the new tax credits getting taken away if you use an FSA? You can't do both?

Yes, I am confused too and haven't read up on this. Am pressed for time today but would definitely like some help here.

I skimmed the entire 32 page report and I don't see anything that seems to imply an either or relating to the CTC and the Dependend FSA.   The CDCTC (Child and Dependent Childcare Tax Credit) seems to be what is being asked about in the OP. 

https://fas.org/sgp/crs/misc/R44993.pdf/

According to that document you can claim both the CDCTC and use a Dependent Care FSA, but you cannot count out of pocket expenses on both, so if you spend $10,500 (2021's new cap for the FSA) on childcare and spend $4500 more in the year you can only apply the CDCTC to the $4500 remaining. 

EvenSteven

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #9 on: March 18, 2021, 09:22:27 AM »
Dependent care tax credit for 2021 tax year:

1) You can claim up to $8000 of expenses if you have 1 dependent, and up to $16,000 if you have more than 1.

2) The credit is for 50% of the claimed expenses for those with AGI of $125,000 or lower. The credit starts to phase out at a rate of 1% for every $2,000 over 125K.


Dependent care FSA for 2021 tax year:

1) Can contribute up to $10,500, if your the provider your employer uses allows it.

2) The contribution amount lowers your AGI and comes out of your paycheck, so you will be saving Federal, State, and FICA taxes at your marginal rate.

3) If you have expenses above the contribution amount of the FSA, you can claim the tax credit. So if you have 2 dependents, and 16,000 in expenses, you could use the FSA for the first $10,500 of expenses, then claim $5,500 of expenses for the tax credit.


https://www.kitces.com/blog/the-american-rescue-plan-act-of-2021-tax-credits-stimulus-checks-and-more-that-advisors-need-to-know/

phildonnia

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #10 on: March 18, 2021, 09:28:39 AM »
Credit (phase out after 125K AGI at 150k AGI should put you around 38% credit): (0.38) (12,000) = $4560

I thought the qualifying expenses were limited to $6000 for the credit and $5000 for the FSA.  Has this changed since 2020?

EvenSteven

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #11 on: March 18, 2021, 09:35:35 AM »
Credit (phase out after 125K AGI at 150k AGI should put you around 38% credit): (0.38) (12,000) = $4560

I thought the qualifying expenses were limited to $6000 for the credit and $5000 for the FSA.  Has this changed since 2020?

Yes, the new bill (American Rescue Plan Act of 2021) changes these limits for the 2021 tax year. They also increase the amount of the credit up to 50% of expenses, and starts the phase out later.

phildonnia

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #12 on: March 18, 2021, 09:39:19 AM »
Credit (phase out after 125K AGI at 150k AGI should put you around 38% credit): (0.38) (12,000) = $4560

I thought the qualifying expenses were limited to $6000 for the credit and $5000 for the FSA.  Has this changed since 2020?

Yes, the new bill (American Rescue Plan Act of 2021) changes these limits for the 2021 tax year. They also increase the amount of the credit up to 50% of expenses, and starts the phase out later.
According to Wikipedia, the limit is now $8000.  So the math above is wrong if 38% is being applied to $12000.  I didn't see any changes to the FSA limit, so presumably this would still be limited to $5000?  In which case, that math is wrong too.

EvenSteven

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #13 on: March 18, 2021, 09:45:20 AM »
Credit (phase out after 125K AGI at 150k AGI should put you around 38% credit): (0.38) (12,000) = $4560

I thought the qualifying expenses were limited to $6000 for the credit and $5000 for the FSA.  Has this changed since 2020?

Yes, the new bill (American Rescue Plan Act of 2021) changes these limits for the 2021 tax year. They also increase the amount of the credit up to 50% of expenses, and starts the phase out later.
According to Wikipedia, the limit is now $8000.  So the math above is wrong if 38% is being applied to $12000.  I didn't see any changes to the FSA limit, so presumably this would still be limited to $5000?  In which case, that math is wrong too.

For the dependent care tax credit: 8000 for 1 dependent, and 16000 for more than 1.

The dependent care FSA limit was increased to 10,500, but whether or not you are allowed to change your contributions will depend on your FSA provider.

Here is a helpful summary: https://www.kitces.com/blog/the-american-rescue-plan-act-of-2021-tax-credits-stimulus-checks-and-more-that-advisors-need-to-know/

Edit: From the house bill sections 9631 and 9632

https://www.congress.gov/bill/117th-congress/house-bill/1319/text?q=%7B%22search%22%3A%5B%22HR+1319%22%5D%7D&r=1&s=1#toc-H3DF9D268E2F441EE878C4EE4AA64D2FD
« Last Edit: March 18, 2021, 09:59:00 AM by EvenSteven »

kpd905

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #14 on: March 18, 2021, 10:24:15 AM »
My employer just told me I can change my contribution to the FSA for the rest of the year.

I am going to drop it down to about $1.60 per paycheck because they require a contribution on each paycheck to receive their $500 annual match.  This will make my total contribution amount $900, and their $500 match makes $1400 total into the FSA.  I assume I can then use the remainder of the $8000 credit toward one child?

We have two kids and AGI under $125k, so I think I should end up getting:

Kid 1: (8000-1400)*.5= $3300
Kid 2: 8000*.5= $4000

Plus the $500 employer match and about $225 reduced taxes from my $900 of FSA contributions.  So a total of $8425 reduced from our daycare cost.

If anyone sees a glaring error with the FSA and tax credit combo for Kid 1, please let me know.  I am supposed to submit my forms to HR today.

EvenSteven

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #15 on: March 18, 2021, 10:36:08 AM »
My employer just told me I can change my contribution to the FSA for the rest of the year.

I am going to drop it down to about $1.60 per paycheck because they require a contribution on each paycheck to receive their $500 annual match.  This will make my total contribution amount $900, and their $500 match makes $1400 total into the FSA.  I assume I can then use the remainder of the $8000 credit toward one child?

We have two kids and AGI under $125k, so I think I should end up getting:

Kid 1: (8000-1400)*.5= $3300
Kid 2: 8000*.5= $4000

Plus the $500 employer match and about $225 reduced taxes from my $900 of FSA contributions.  So a total of $8425 reduced from our daycare cost.

If anyone sees a glaring error with the FSA and tax credit combo for Kid 1, please let me know.  I am supposed to submit my forms to HR today.

That looks right to me, as long as you have 16K of childcare expenses this year.

kpd905

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #16 on: March 18, 2021, 11:06:09 AM »

That looks right to me, as long as you have 16K of childcare expenses this year.

Thanks for the confirmation.  Fortunately or unfortunately, we have about $34,000 in childcare expenses this year.
« Last Edit: March 20, 2021, 05:58:27 AM by kpd905 »

JSMustachian

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #17 on: March 19, 2021, 12:49:51 PM »
Can someone confirm my math looks correct for this credit. My employer signs us up for benefits in June each year so I signed up for the max $5000 dependant care FSA in 2020. $2500 of that occurs in 2021.

$10,000 in daycare costs for 2021. 12%  tax bracket. AGI $62,000

$2500 of expenses from last years DC FSA- ($2500*19.65%)= $491.25
7500 of expenses left unused if I do not take the dependent care FSA for 2021- ($7500*50%)= $3750
Total= $4241.25

If I opt for the new dependent care FSA in July it will look like this:
$2500 of expenses from last years DC FSA- ($2500*19.65%)= $491.25
Elect for new dependent care FSA- $10,000 ($5,000 in 2021, $5000 in 2022) I'm  not sure how HR of my company will structure this but this is how its been done in the past.
($5000*19.65)= $982.50+$491.25= $1473.75

2022
($5000*19.65)= $982.5

Total= $2456.25

The dependent care credit looks like the better option unless all this math is wrong.


EvenSteven

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #18 on: March 19, 2021, 03:35:51 PM »
Can someone confirm my math looks correct for this credit. My employer signs us up for benefits in June each year so I signed up for the max $5000 dependant care FSA in 2020. $2500 of that occurs in 2021.

$10,000 in daycare costs for 2021. 12%  tax bracket. AGI $62,000

$2500 of expenses from last years DC FSA- ($2500*19.65%)= $491.25
7500 of expenses left unused if I do not take the dependent care FSA for 2021- ($7500*50%)= $3750
Total= $4241.25

This part looks correct if you have more than 1 qualifying dependent.

Quote
If I opt for the new dependent care FSA in July it will look like this:
$2500 of expenses from last years DC FSA- ($2500*19.65%)= $491.25
Elect for new dependent care FSA- $10,000 ($5,000 in 2021, $5000 in 2022) I'm  not sure how HR of my company will structure this but this is how its been done in the past.
($5000*19.65)= $982.50+$491.25= $1473.75

2022
($5000*19.65)= $982.5

Total= $2456.25

The dependent care credit looks like the better option unless all this math is wrong.

The way you or your company is breaking this up over multiple years is super confusing to me. It looks like they will only allow you to contribute a maximum of $7,500 for tax year 2021? If that is the case then you could claim an additional 2,500 of expenses at 50% credit to that for tax year 2021, as long as you have more than 1 qualifying dependent.

Neva6

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #19 on: April 07, 2021, 11:03:20 AM »
Came to post about this and saw this thread. I was planning to change my FSA contribution to max at the new $10500 limit but then did the math and I think the tax credit is better.

2 kids - ~$13000 of expenses
AGI will be ~140k

So FSA benefit is 22% fed, 7.65% SS, 4.55% state = 34.2%
vs
Tax credit of 42% at 141k AGI (reduced from 50% at 1% per 2k over 125k).

AGI would need to rise to 157k to equal the 34% benefit from the FSA.

Am I thinking of this correctly?

seattlecyclone

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #20 on: April 07, 2021, 11:57:33 AM »
Came to post about this and saw this thread. I was planning to change my FSA contribution to max at the new $10500 limit but then did the math and I think the tax credit is better.

2 kids - ~$13000 of expenses
AGI will be ~140k

So FSA benefit is 22% fed, 7.65% SS, 4.55% state = 34.2%
vs
Tax credit of 42% at 141k AGI (reduced from 50% at 1% per 2k over 125k).

AGI would need to rise to 157k to equal the 34% benefit from the FSA.

Am I thinking of this correctly?

Pretty much, yes. Note that the tax credit has little cliffs in it every $2,000, and your FSA will lower your AGI. If you have the ability to predict things pretty exactly, and you're close to one of those lines where the credit changes by 1%, it's worth $130 of extra child care tax credits for you to make a token FSA/HSA/401(k) contribution as needed to ensure your AGI is $140,999 instead of $141,001.

Neva6

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #21 on: April 07, 2021, 01:47:58 PM »
Ya I realized that in my later calculations. When I do contribute the full amount to the FSA it lowers my AGI and the remaining tax credit goes to ~46% from ~42%. But of course there is only a few thousand left that qualifies for the credit. Thanks for the tip about the 'cliffs'. I'll see what I can do.

Mustache ride

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #22 on: April 10, 2021, 09:31:11 PM »
Am I reading this correctly that if I have 1 child and over $18,500 in eligible childcare costs, I can max the $10,500 FSA and take full advantage of the $8,000 credit? It's not an either or situation?

EvenSteven

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Re: Stimulus - Nix Dependent Care FSA?
« Reply #23 on: April 12, 2021, 08:52:32 AM »
Am I reading this correctly that if I have 1 child and over $18,500 in eligible childcare costs, I can max the $10,500 FSA and take full advantage of the $8,000 credit? It's not an either or situation?

If only we could be so lucky! You have to pick one or the other. If you put in 10,500 to the FSA you cannot claim anything for the credit.