How to Decide Whether to Use a Dependent Care FSA or Child Care Tax Credits

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By eHow Contributing Writer

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The federal government offers taxpayers claiming a child as a dependent on IRS reporting two mediums for saving money on child care. Although, not without limitations. Employer offered Dependent Care FSAs allow employee pre-taxed income to be taken out of their earnings for future child care expense reimbursement. The child care tax credits provides the taxpayer a percentage of their reported child care expenses.

Difficulty: Moderate

Instructions

Things You'll Need:

Calculator

Step 1

Calculate total income reported annually to the IRS for the person or people claiming the child as a dependent. FSAs have no income level limitations, but the child care tax credits limit benefits to a 35 percent credit for total earnings under $15,000 annually or 20 percent for total earnings up to $45,000 annually.
Step 2

Determine if the dependent care FSA is even an option. Ask employer if they offer an FSA. Continue this process only if FSAs are an option.
Step 3

Estimate the amount of child care expenses that qualify for an FSAs reimbursement or tax credits. Include payment for employment related child care expenses only.
Step 4

Figure out which option or combination of options provide the most benefits. Combining the two programs still limits the financial benefit to the maximum allowed under eligible percentage of child care tax credits.
Step 5

Make an educated decision and complete the necessary paper work. Obtain FSA forms from an employer and child care tax credit forms (Form 2441) wherever IRS tax forms are available.

Tips & Warnings

Generally, the higher a taxpayer's income, the less the child care tax credits benefit. Therefore, the more the taxpayer should lean towards an FSA.
FSAs are limited to contribution of $2,500 per taxpayer or $5,000 if filing taxes jointly given that the employee earn at least that amount. Any amount not reimbursed by the end of the spending year is forfeited and doesn't count towards the total when combining FSAs and the child care tax credit. FSAs are established in the year prior to the spending year.
The child care tax credits limit the percentage of credit received to $3,000 or $6,000 for more than one child. The child care tax credit is reported on taxes subsequent to the spending year.

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