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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Pixelshot on December 06, 2013, 07:02:38 AM

Title: to FSA or not to FSA (Child Care Expenses)
Post by: Pixelshot on December 06, 2013, 07:02:38 AM

It's time to re-up my wife's FSA (Federal Savings Account) for health care and child care expenses. I think, though, that it's not worth doing. We can set aside a set amount of pre-tax money per paycheck to go into a pool for child care expenses. That money, once set aside, has to be used for that purpose or else it is lost. We have a 3-year old who is now in school so our child care expenses are minimal. However, this summer we will probably have to hire a babysitter (total estimate is under $2000 for the summer) to cover for some work obligations. The question is if it's worth setting aside the money at all because as far as I know, I can deduct child care expenses from our after-tax income when I do my taxes (see link below). So, as long as i'm within the limit of $3000, then it seems like it wouldn't make sense to put that money at risk of not being used when I can simply deduct it later as an itemized expense (I will definitely be itemizing my deductions due to charity contributions).

Is there something I'm missing here? Is the deduction the same amount if I do it manually versus through the FSA?

Here is the IRS page. It's pretty clear except for the somewhat cryptic paragraph #7 that I don't completely understand.

http://www.irs.gov/publications/p503/ar02.html

"7. If you exclude or deduct dependent care benefits provided by a dependent care benefit plan, the total amount you exclude or deduct must be less than the dollar limit for qualifying expenses (generally, $3,000 if one qualifying person was cared for or $6,000 if two or more qualifying persons were cared for). (If two or more qualifying persons were cared for, the amount you exclude or deduct will always be less than the dollar limit, since the total amount you can exclude or deduct is limited to $5,000."

Thanks for your help.

Title: Re: to FSA or not to FSA (Child Care Expenses)
Post by: TheDude on December 06, 2013, 09:07:55 AM

It somewhat depends on your tax rate. However if you are in the 15% tax rate or above its almost always better to do the FSA because you dont have to pay the 7.65% ss and medicare tax.

Look up you AGI in pub 503 see what percentage you can take as a credit. If your AGI is about 43000 then you can only take 20% as a credit.

Credit 20% X 2000 = $400    DFSA 2000 X (15+7.65) = $453

So really more info is needed to give a true answer but my best guess would be the DFSA is better