FSA Dependent versus Child Care Tax Credit

[brandino29]

It's open enrollment period and I noticed an option I'd never paid attention to before -- the Flexible Spending Account for Dependent Care Expenses.  We have a one year old daughter who is in daycare and I'm wondering if this is a route worth going. 

Based on my understanding, as married filing jointly, we can set aside up to $5,000 in this FSA in pre-tax dollars.  Our daycare will cost us about $8,000 next year so I fully expect to be able to max it out.  I'm estimating that our combined taxable income in 2014 will be about $70k putting us in the 15% marginal federal tax bracket, meaning that we would be able to reduce that to $65k, saving $750 on taxes. 

For 2013, we had $70k in taxable income and were able to claim the Child Care Tax Credit for $600 on our return. 

The way the FSA is set up that we have access to would require us to pay the daycare upfront and then request reimbursement from the FSA.  I have no idea how easy or complicated that request may be or how long it takes to be reimbursed

Does anyone have any insight on the hassle that may or may not be involved and whether it's worth it to go through it to save $150 for the year on our tax bill?  Are there other considerations I'm overlooking -- for instance, can these two be combined for an even greater tax credit?

[La Bibliotecaria Feroz]

I've never tried it, but the savings might be greater as I THINK you might be able to still take the child care tax credit on your unreimbursed expenses.

But even if it took five full hours of paperwork every year and even if you saved only the $150, you would make $30 an hour for your trouble. Seems like it would probably pay off!

[MDM]

Does anyone have any insight on the hassle that may or may not be involved

That will depend on your specific company and the system they use.  Never used the child care FSA but the health care FSA was always a great benefit.  Based on your description of your situation it seems well worth your while to do the child care FSA.  Do you already do the health care FSA?

[brandino29]

I've never tried it, but the savings might be greater as I THINK you might be able to still take the child care tax credit on your unreimbursed expenses.

Interesting, that would definitely make it worthwhile.  I'll have to do some more research on it.

That will depend on your specific company and the system they use.  Never used the child care FSA but the health care FSA was always a great benefit.  Based on your description of your situation it seems well worth your while to do the child care FSA.  Do you already do the health care FSA?

Not for a few years.  We're young and healthy and haven't ever expected significant health expenses so it wasn't worth the risk of losing money if we didn't use it.  A few years ago I put aside a small amount, maybe $250, or something to use for contact lenses and I do recall it being a hassle not worth the effort.  But that was for a savings of essentially a couple of bucks.  I'm not even sure if it's the same third party company offering the FSA. 

[Cpa Cat]

1. You may be able to take Child Care Tax Credit on unreimbursed expenses.

2. If you do the FSA as a payroll deduction, it's exempt from FICA. So you save there too.

Edit: Fixed per Brandino's comments below.

[brandino29]

1. You can take Child Tax Credit on unreimbursed expenses.

2. If you do the FSA as a payroll deduction, it's exempt from FICA. So you save there too.

CPA, do you mean the Child Care Tax Credit?  I think you do, just clarifying.  And great point about the FICA!

So I should be able to set aside $5,000 in the FSA, reduce my tax liability by $750, save an additional 6.2% on FICA ($310) AND get a child care tax credit on the ~$3,000 in unreimbursed daycare expenses, which should still meet the max $600 credit available. 

All told, we should save about $1,660 by doing this?!

[Cheddar Stacker]

Another benefit to using the FSA vs. taking the credit is you can get it without dual taxable incomes. The child care credit is limited to the lower taxable wage of the 2 parents.

If one of you makes $60K and the other makes $10K, you could have the $10K person put as much as possible into the 401K reducing that taxable income to almost $0. You would no longer be eligible for the credit if wages were too low, but you could still get the deduction via your pretax withholdings for the FSA.

This is the situation I'm in, and I posted about it earlier this year. I'm the majority breadwinner, and due to other tax anomalies we've decided to defer 75% of my wife's income (approx. $10K) into her 401K leaving her with maybe $2K federally taxable income. We need her income to be $6K to take full advantage of the credit, so I'm looking to start an FSA at my work this summer to get the full benefit of these costs.

Good luck figuring out what works best for you.

[kaizen]

I had a dependent care FSA the last 3 years, and the amount saved was well worth the hassle. In that time the company had 3 different systems of varying levels of hassle, but even the more 'painful' system was still worth it. Because the money was taken out of each paycheck, I would also wait and submit for reimbursements approx. quarterly, then have a bigg-ish chunk to put towards loans. Kind of a way to trick myself into savings, since I'd already spent the day care funds and 'felt' the loss of funds.

[brandino29]

1. You can take Child Tax Credit on unreimbursed expenses.

Actually, upon doing some more digging, I don't think this is right.  http://www.kiplinger.com/article/taxes/T054-C001-S001-claiming-the-child-care-tax-credit.html Looks like the only case is if you have 2 or more kids and you can only claim up to an additional $1,000 on the child care credit. 

Still, with the FICA savings it definitely makes it worth it. 

Thanks for everyone's comments!!

[Cheddar Stacker]

1. You can take Child Tax Credit on unreimbursed expenses.

Actually, upon doing some more digging, I don't think this is right.  http://www.kiplinger.com/article/taxes/T054-C001-S001-claiming-the-child-care-tax-credit.html Looks like the only case is if you have 2 or more kids and you can only claim up to an additional $1,000 on the child care credit. 

Still, with the FICA savings it definitely makes it worth it. 

Thanks for everyone's comments!!

I didn't see from your comment that you only had 1 kid. If that's the case, you definitely can't do both if you're contributing $5K to the FSA.