Author Topic: Pre-tax daycare vs. federal tax credit  (Read 1694 times)

john6221

  • Stubble
  • **
  • Posts: 128
Pre-tax daycare vs. federal tax credit
« on: May 18, 2017, 11:53:49 AM »
Recently my wife and I had our first child. I am trying to figure out which way to go with our flexible spending accounts in regards to the opportunity I have to choose a pre-tax daycare account through my employer. I am eligible to set aside up to $5,000 for the (half) year. I am trying to figure out if it makes more sense to enroll in the paycheck deductions, or pay the expenses out of pocket and then take the tax credit. The situation is a little more complex because my wife is a full time student with an income of $0 so I'm not sure how that affects the credit.  What would be a good way to go about figuring this out?




nobody123

  • Pencil Stache
  • ****
  • Posts: 524
Re: Pre-tax daycare vs. federal tax credit
« Reply #1 on: May 18, 2017, 12:21:53 PM »
Assuming my Google skills are up to par, a Flex account lets you avoid social security, state, and local tax on the money.  Assuming you know you will use the whole $5K, that is the way to go.  If you only have one kid, the credit is only taken against the first $3K in expenses.  I'm not sure if you can double-dip and do both if your total expenses are $8K+.

Gin1984

  • Magnum Stache
  • ******
  • Posts: 4701
Re: Pre-tax daycare vs. federal tax credit
« Reply #2 on: May 18, 2017, 12:26:01 PM »
You cannot use both for one child.  You can only use $1000 of the credit for a second child and not all for a first child, if you use the FSA.

Sent from my SPH-L710 using Tapatalk


john6221

  • Stubble
  • **
  • Posts: 128
Re: Pre-tax daycare vs. federal tax credit
« Reply #3 on: May 18, 2017, 12:47:19 PM »
The hardest part is estimating our expenses as this is our first child. Since my wife is working on her degree, we don't yet have a good idea of how many days of daycare we will need. I have to enroll within the next 30 days. I would put the whole $5k in pre-tax but if I don't use it, I lose it.

Sent from my XT1575 using Tapatalk


Vindicated

  • Handlebar Stache
  • *****
  • Posts: 1111
  • Age: 35
  • Location: Indianapolis
Re: Pre-tax daycare vs. federal tax credit
« Reply #4 on: May 18, 2017, 12:51:48 PM »
The hardest part is estimating our expenses as this is our first child. Since my wife is working on her degree, we don't yet have a good idea of how many days of daycare we will need. I have to enroll within the next 30 days. I would put the whole $5k in pre-tax but if I don't use it, I lose it.

Sent from my XT1575 using Tapatalk

Have you checked daycare prices in your area?  We easily use the entire $5k of the Dependent Care Account (DCA) on daycare.  Our daycare costs $240/week.... I just checked the math.  We'll have used up our entire DCA by the 25th of this month.

john6221

  • Stubble
  • **
  • Posts: 128
Re: Pre-tax daycare vs. federal tax credit
« Reply #5 on: May 19, 2017, 07:12:32 AM »
I did some more research and it looks like the IRS considers full time students to have an income of $250/month, so that means my maximum amount I can contribute pre-tax would be $3000.

Sent from my XT1575 using Tapatalk


Psychstache

  • Pencil Stache
  • ****
  • Posts: 797
Re: Pre-tax daycare vs. federal tax credit
« Reply #6 on: May 19, 2017, 07:16:20 AM »
I recently went through this as well (8 month old). My wife and I both work full time and gross around 120k, so for us the Daycare FSA was easily the way to go.

JustGettingStarted1980

  • Bristles
  • ***
  • Posts: 377
Re: Pre-tax daycare vs. federal tax credit
« Reply #7 on: May 19, 2017, 07:59:52 AM »
We use the daycare FSA (which applies to summer camps too!), then we use the extra 1K that the Tax Man allows us for Child Care Tax Credit. These things add up!

Gin1984

  • Magnum Stache
  • ******
  • Posts: 4701
Re: Pre-tax daycare vs. federal tax credit
« Reply #8 on: May 19, 2017, 10:02:18 AM »
I did some more research and it looks like the IRS considers full time students to have an income of $250/month, so that means my maximum amount I can contribute pre-tax would be $3000.

That doesn't make sense.  You are married, so you can contribute to YOUR employer's pre-tax dependent care plan.  I don't see how your wife's income comes into play.  As long as your wife is not a SAHM, I think you can do the full $5k.
According to the IRS:
Quote
Exclusion or deduction.If your employer provides dependent care benefits under a qualified plan, you may be able  to  exclude  these  benefits  from  your  income.  Your employer can tell you whether your benefit plan qualifies. To claim the exclusion, you must complete Part III of Form 2441. You can't use Form 1040EZ. If  you  are  self-employed  and  receive  benefits  from  a qualified dependent care benefit plan, you are treated as both employer and employee. Therefore, you wouldn't get an exclusion from wages. Instead, you would get a deduction  on  Form  1040,  Schedule  C,  line  14;  Schedule  E, line 19 or 28; or Schedule F, line 15. To claim the deduction, you must use Form 2441.The amount you can exclude or deduct is limited to the smallest of:1.The total amount of dependent care benefits you received during the year,2.The total amount of qualified expenses you incurred during the year,3.Your earned income,4.Your spouse's earned income, or 5.$5,000 ($2,500 if married filing separately)
and
Quote
You or your spouse is a student or not able to care for self.Your spouse who is either a full-time student or not able to care for himself or herself is treated as having earned income. His or her earned income for each month is considered to be at least $250 if there is one qualifying person in your home, or at least $500 if there are two or more.