Partial DCFSA or DCTC for 2022

[JJ-]

Greetings,

I'm hoping somebody can point me to the right way to assess the best approach for 2022 knowing that only one spouse will be working in 2022 past the first few months. We're going to keep kids in daycare, so I believe only the proportional amount of time worked by both spouses makes us eligible for either the DCFSA or DCTC.

For what it's worth, our daycare spending exceeds the limits of either the DCTC or DCFSA contributions. I'm just trying to figure out if it makes sense to contribute to a DCFSA or just claim the DCTC.

I am planning on doing either ROTH conversions or capital gains harvesting to fill up the tax bracket. Should I just go do math with the Case Study Spreadsheet and divide it by 4 to see which is greater? Or is that oversimplifying.

[JJ-]

So I dug through Pub 503 today and found some things of interest.

There is significant discussion on the limit being a yearly limit, and the section on Dollar limit page 11

Dollar Limit
There is a dollar limit on the amount of your work-related expenses you can use to figure the credit. This limit is $3,000 for one qualifying person, or $6,000 for two or more qualifying persons.

Tip: If you paid work-related expenses for the care of two or more qualifying persons, the applicable dollar limit is $6,000. This limit doesn't need to be divided equally among them. For example, if your work-related expenses for the care of one qualifying person are $3,200 and your work-related expenses for another qualifying person are $2,800, you can use the total, $6,000, when figuring the credit.

Yearly limit. The dollar limit is a yearly limit. The amount of the dollar limit remains the same no matter how long, during the year, you have a qualifying person in your household. Use the $3,000 limit if you paid work-related expenses for the care of one qualifying person at any time during the year. Use
 6,000 if you paid work-related expenses for the care of more than one qualifying person at any time during the year.

Example 1. You pay $500 a month for after-school care for your son. He turned 13 on May 1 and is no longer a qualifying person. You can use the $2,000 of expenses for his care January through April to figure your credit because it isn't more than the $3,000 yearly limit.

Example 2. In July of this year, to permit your spouse to begin a new job(note, seriously? permit?), you enrolled your 3-year-old daughter in a nursery school that provides preschool childcare. You paid $300 per month for the childcare. You can use the full $1,800 you paid ($300 × 6 months) as qualified expenses because it isn't more than the $3,000 yearly limit

It seems that it's not prorated, and that as long as we are both employed, expenses for those periods are fully covered.

I also thought it was interesting to see the "tip" because ordinarily I thought for the tax credit for 2021, it was limited to $8,000/kid. Under normal circumstances per this publication, it explicitly states here that you can spend more than $3k on one kid and claim up to the maximum of $6k for 2 kids even if one was under $3k. I assume that this will apply to the $8k/$16k for 2021?

[Proud Foot]

Outside of tax year 2021 the DCFSA typically makes most  sense as it comes of pretax, including SS and Medicare. Also some states may have a lower cap on the earnings to receive the DCTC. In my state you lose the credit if your state AGI exceeds $100k. In your situation I think the biggest thing to look at and consider is the earned income limits. If only one spouse will be working past the first few months then you will need to make sure the spouse working only a few months has enough earned income to not impact any DCFSA or DCTC contributions. You say kids so I assume multiple dependents. As of today that means they will need at least $6k earned income to receive the full benefit.

I am not sure what you mean by your note in the quote from Pub 503. I feel you may be reading into the wording a little too much. 

[JJ-]

Outside of tax year 2021 the DCFSA typically makes most  sense as it comes of pretax, including SS and Medicare. Also some states may have a lower cap on the earnings to receive the DCTC. In my state you lose the credit if your state AGI exceeds $100k. In your situation I think the biggest thing to look at and consider is the earned income limits. If only one spouse will be working past the first few months then you will need to make sure the spouse working only a few months has enough earned income to not impact any DCFSA or DCTC contributions. You say kids so I assume multiple dependents. As of today that means they will need at least $6k earned income to receive the full benefit.

I am not sure what you mean by your note in the quote from Pub 503. I feel you may be reading into the wording a little too much.

Thanks. The expenses for the first three months will be roughly $4500 so we would not claim maximum benefit. Calcs favor DCFSA.

My note was really a call out on the language chosen in the publication. I would never think to "permit" my spouse to start a new job. Pretty poor choice of words. 

[Proud Foot]

Yes the DCFSA definitely seems to be more beneficial.

I agree with you on the permitting a spouse to start a new job. It could have been written and ordered differently but I read it as enrolling the child in the nursery preschool is what permits the spouse to start a new job.