How to Choose Between Child Care Tax Credit & Flex Account
If your employer offers a Dependent Care Flexible Spending Account, you most likely have the benefit of choosing to save more money on taxes if you must put your kids in day care so that you can work. However, there are some exceptions and the details can be confusing. Consider your personal and financial situation before deciding whether to use your flexible spending account option, take the child care tax credit, or even use both.
Other People Are Reading
Instructions
-
-
1
Estimate your income and child care expenses for the upcoming year.
-
2
Compare your expenses to the child care credit allowances. For married couples filing jointly, the child care tax credit for 2009 is up to $3,000 for one child and $6,000 for two or more children. That means if you spend $5,000 a year for one child you can only get a credit for up to $3,000; if you spend $5,000 a year for two children, you get a credit for the entire amount.
-
-
3
Understand the allowances for a Dependent Care Flexible Spending Account. In 2009, married couples filing jointly could put up to $5,000 into a flex account for child care expenses, no matter how many children they had. The full $5,000 could be used on a single child's day care expenses. Money put into a flexible spending account is not subject to any federal, Social Security or Medicare taxes, ultimately lowering your tax bill more than by just taking the child care credit.
-
4
Note that some workers can use both the child care credit and the flexible spending account. If you have two or more children and pay more than $5,000 in child care costs so that you may work, you can put $5,000 into a DFSA and qualify for up to an additional $1,000 child care credit.
-
5
Do the math. If you and your spouse make more $43,000 a year and each of you makes more in a year than the cost of child care, then the DFSA is usually the better deal. For couples with only one child who spend more than $3,000 a year on child care, the DFSA is also usually a better deal. For couples making less than $43,000 or for single parents, the tax breaks may be different and you should consult a tax specialist.
-
6
Remember there are some disadvantages to flexible spending accounts. The money is taken out of your paycheck, and you typically have to apply for reimbursement by filling out a form or sending in receipts. Flexible spending accounts are also "use it or lose it" accounts. Don't overestimate your child care costs because any extra money in the account at the end of the year is kept by the government.
-
1
Tips & Warnings
For the best and most up-to-date advice, consult with a tax specialist.
Your own financial situation and tax bracket may not apply to these tax breaks.
