Dependent FSA and Dependent Care Tax Credit?

[TheGadfly]

I've scoured the IRS website and still can't find an answer to my question: If I max out my Dependent Care FSA, can I also claim the Child and Dependent Care tax credit?

I have a Dependent Care FSA that I plan to max out this year ($5000). I have one child in daycare and this covers a third of that annual expense ($15,000).

Am I able to claim all or part of the Dependent Care Tax Credit? If so, how much? Our MAGI is $140k and we quality for the credit.

TIA!

[MDM]

The changes in the American Rescue Plan Act of 2021 were for 2021 only.  Unless Congress makes another change, things will be back to the 2020 situation and I think the $5000 deduction will cause you to be ineligible for the credit.

At least, that's how the case study spreadsheet calculates it.

[Psychstache]

The changes in the American Rescue Plan Act of 2021 were for 2021 only.  Unless Congress makes another change, things will be back to the 2020 situation and I think the $5000 deduction will cause you to be ineligible for the credit.

At least, that's how the case study spreadsheet calculates it.

MDM has the right of it. Basically, the $3000 credit will be wiped out by the $5000 in contributions. If you had 2 kids, you could still get $1000 in dependent care credits. I stopped using the DCFSA for this exact reason.

[lifeisshort123]

So if you contribute to the DCFSA you are ineligible for the tax credit? That seems ridiculous to me….

[MDM]

So if you contribute to the DCFSA you are ineligible for the tax credit? That seems ridiculous to me….

The DCFSA does provide an income deduction.  Whether the deduction or credit is better will vary by situation.

See Form 2441, both for how it worked in 2021 and, based on the 2020 form and assuming no further congressional action, how it will work for 2022.

Not saying it's not ridiculous - after all, it's tax law.... ;)

[volleyballer]

This will be my first year with daycare expenses. DW goes back to work in September and DD will be going to daycare. Can I run this past the group to see if I have it right?

We will incur approximately $5k in daycare expenses in 2022.
$3k pay out of pocket, this will max out the qualifying expenses, netting a $1,050 tax credit
$2k elected to DCFSA to cover the rest.

In 2022 we will gross approximately 150k, (110k after maxing out 401k's)

Likewise, for 2023 (assuming it's similar to 2022)
Expected earnings $190k (130k after 401/403/457 contributions)
Expected daycare expenses $12k
$5k for dcfsa
$7k paid out of pocket, $3k of which is qualifying expenses for the tax credit

[Psychstache]

This will be my first year with daycare expenses. DW goes back to work in September and DD will be going to daycare. Can I run this past the group to see if I have it right?

We will incur approximately $5k in daycare expenses in 2022.
$3k pay out of pocket, this will max out the qualifying expenses, netting a $1,050 tax credit
$2k elected to DCFSA to cover the rest.

In 2022 we will gross approximately 150k, (110k after maxing out 401k's)

Likewise, for 2023 (assuming it's similar to 2022)
Expected earnings $190k (130k after 401/403/457 contributions)
Expected daycare expenses $12k
$5k for dcfsa
$7k paid out of pocket, $3k of which is qualifying expenses for the tax credit

That won't work. The DCFSA contributions will be netted against your total credit come tax time. So in your 2022 example, you would enter your total daycare expenses ($5k), then calculate your credit ($3k), then subtract your DCFSA contributions ($2k), which leaves you a $1k tax credit.

Put another way:

$5k in expenses becomes $3k credit - $2k FSA contribution = $1k credit.

[volleyballer]

That won't work. The DCFSA contributions will be netted against your total credit come tax time. So in your 2022 example, you would enter your total daycare expenses ($5k), then calculate your credit ($3k), then subtract your DCFSA contributions ($2k), which leaves you a $1k tax credit.

Put another way:

$5k in expenses becomes $3k credit - $2k FSA contribution = $1k credit.

Thanks for the reply. I started working through form 2441 (year 2021) and I think I understand what you're saying. On line 12 I subtract out dependent care benefits received.

[volleyballer]

I just stumbled across this calculator which may be helpful.

https://harrisonfinancialplanning.com/tools-dependent-care-tax-credit-fsa/

So in both my 2022 and 2023 cases, it appears I am better served using the tax credit and not using the dcfsa. Playing with the calculator a bit, it appears the dcfsa becomes the better option at higher income levels.