Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

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Beachey
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by Beachey »

phinanciallyfit wrote: Mon Apr 19, 2021 5:48 pm This has been a really helpful post, but I have a question that wasnt addressed. We have 2 kids, but we do not spend equally on the 2 kids. Is it $8,000 per kid or up to $16,000 for 2 kids regardless of how the costs are distributed? For example, if we paid $12000 for 1 kid and $4000 for summer camp for kid 2, are we eligible for the 50% (per our agi) credit on $16,000 or is it only $8000 for kid 1 and $4000(paid amount) for kid 2?
Doesn't matter, review Form 2441 https://www.irs.gov/pub/irs-pdf/f2441.pdf

Part I asks you for the Care Providers, Part II asks for the children's names. Doesn't ask you to line identify what expenses went for which child.
mwesty
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by mwesty »

mwesty wrote: Sat Apr 10, 2021 8:51 pm So confused, been reading about this for days. Help!

MFJ
22% in MD
Both teachers
Under $150k total income
Pay 20k in childcare- 3 kids all 5 and under
Wife upped DCFSA to $10.5

Was maxing the DCFSA the right choice? I’m thinking no after reading everything
Our tax advisor got back to us and said to leave the DCFSA @ 5k then take the tax credit fwiw
newbie_Mo
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by newbie_Mo »

My head is spinning around this now.

Here is our situation, if anyone can tell me whether we should max out the $10,500 that would be great. We've already elected to contribute $5000 to DCFAS.

Married Filing jointly. Pa tax 3. 07%
Have to Pay FICA
2020 tax year AGI $172,000 (that's after the DCFAS contribution in 2020). We expect same income in 2021.
Two kids total day care cost $16500 (one is $11000, the other $5500).

Should we max out or stay with $5000 DCFAS? thank you very much.
csmath
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by csmath »

newbie_Mo wrote: Mon Apr 19, 2021 10:25 pm My head is spinning around this now.

Here is our situation, if anyone can tell me whether we should max out the $10,500 that would be great. We've already elected to contribute $5000 to DCFAS.

Married Filing jointly. Pa tax 3. 07%
Have to Pay FICA
2020 tax year AGI $172,000 (that's after the DCFAS contribution in 2020). We expect same income in 2021.
Two kids total day care cost $16500 (one is $11000, the other $5500).

Should we max out or stay with $5000 DCFAS? thank you very much.
If you aren't trying to lower your AGI any other way, then an AGI of 172k phases out the DC Tax Credit to be only a 26% recovery rate.
Your tax rate of Fed + State + FICA = 24% + 3.07% + 7.65% = 34.72%
You will get a greater benefit out of avoiding the taxes compared to the lower DC Tax Credit recover rate of 26%. This means that you should max DCFSA.

Note: If you max DCFSA your AGI drops from $172,000 to $166,500 but that only increases your DC Tax Credit recovery rate to 29% which is still less than you save avoiding the 34.72% income tax. Depending on the rest of your situation, you are starting to get close to the $150k AGI threshold that apparently has a few other possible benefits if you can get below that.

I'm not a tax professional.
newbie_Mo
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by newbie_Mo »

csmath wrote: Mon Apr 19, 2021 11:10 pm
newbie_Mo wrote: Mon Apr 19, 2021 10:25 pm My head is spinning around this now.

Here is our situation, if anyone can tell me whether we should max out the $10,500 that would be great. We've already elected to contribute $5000 to DCFAS.

Married Filing jointly. Pa tax 3. 07%
Have to Pay FICA
2020 tax year AGI $172,000 (that's after the DCFAS contribution in 2020). We expect same income in 2021.
Two kids total day care cost $16500 (one is $11000, the other $5500).

Should we max out or stay with $5000 DCFAS? thank you very much.
If you aren't trying to lower your AGI any other way, then an AGI of 172k phases out the DC Tax Credit to be only a 26% recovery rate.
Your tax rate of Fed + State + FICA = 24% + 3.07% + 7.65% = 34.72%
You will get a greater benefit out of avoiding the taxes compared to the lower DC Tax Credit recover rate of 26%. This means that you should max DCFSA.

Note: If you max DCFSA your AGI drops from $172,000 to $166,500 but that only increases your DC Tax Credit recovery rate to 29% which is still less than you save avoiding the 34.72% income tax. Depending on the rest of your situation, you are starting to get close to the $150k AGI threshold that apparently has a few other possible benefits if you can get below that.

I'm not a tax professional.
Thank you.
The $172k AGI is after all deductions (max out the retirements accounts and DCFAS in 2020).
phinanciallyfit
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by phinanciallyfit »

Beachey wrote: Mon Apr 19, 2021 8:03 pm
phinanciallyfit wrote: Mon Apr 19, 2021 5:48 pm This has been a really helpful post, but I have a question that wasnt addressed. We have 2 kids, but we do not spend equally on the 2 kids. Is it $8,000 per kid or up to $16,000 for 2 kids regardless of how the costs are distributed? For example, if we paid $12000 for 1 kid and $4000 for summer camp for kid 2, are we eligible for the 50% (per our agi) credit on $16,000 or is it only $8000 for kid 1 and $4000(paid amount) for kid 2?
Doesn't matter, review Form 2441 https://www.irs.gov/pub/irs-pdf/f2441.pdf

Part I asks you for the Care Providers, Part II asks for the children's names. Doesn't ask you to line identify what expenses went for which child.
Thank you. That is what I thought, but wanted to get a second opinion.
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FrugalProfessor
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by FrugalProfessor »

This guy's YouTube video on the topic is fantastic: https://www.youtube.com/watch?v=dDlea5ZGA8Y
I blog. Taxes are the lowest hanging source of alpha. I eat tax alpha for breakfast.
20Dukes11
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by 20Dukes11 »

Morning all,

Another lurker here who is trying to decide whether to adjust my contributions to our current $5,000 limit DCFSA. We've already contributed 4 months' worth ($1,666), but our total AGI is well below $100k (probably somewhere in the high $80s/low $90s). Our childcare expenses for the year will be a little more than $15k.

If my math is correct, I believe our total tax rate would be 22% (Fed) + 5.25% (NC state) + 7.65% (FICA) = 34.9%

Any help would be greatly appreciated - thx!
Beachey
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by Beachey »

20Dukes11 wrote: Wed Apr 21, 2021 7:24 am Morning all,

Another lurker here who is trying to decide whether to adjust my contributions to our current $5,000 limit DCFSA. We've already contributed 4 months' worth ($1,666), but our total AGI is well below $100k (probably somewhere in the high $80s/low $90s). Our childcare expenses for the year will be a little more than $15k.

If my math is correct, I believe our total tax rate would be 22% (Fed) + 5.25% (NC state) + 7.65% (FICA) = 34.9%

Any help would be greatly appreciated - thx!
The general consensus would be you would be better off asking your employer to stop the DCFSA contributions and take as much of the tax credit as possible. The only reason you might not want to is this will increase your AGI by ~$3,333. In the $80K/$90K AGI area, it is unlikely to create a tax cliff or under unforeseen consequence.
20Dukes11
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by 20Dukes11 »

Beachey wrote: Wed Apr 21, 2021 8:29 am
20Dukes11 wrote: Wed Apr 21, 2021 7:24 am Morning all,

Another lurker here who is trying to decide whether to adjust my contributions to our current $5,000 limit DCFSA. We've already contributed 4 months' worth ($1,666), but our total AGI is well below $100k (probably somewhere in the high $80s/low $90s). Our childcare expenses for the year will be a little more than $15k.

If my math is correct, I believe our total tax rate would be 22% (Fed) + 5.25% (NC state) + 7.65% (FICA) = 34.9%

Any help would be greatly appreciated - thx!
The general consensus would be you would be better off asking your employer to stop the DCFSA contributions and take as much of the tax credit as possible. The only reason you might not want to is this will increase your AGI by ~$3,333. In the $80K/$90K AGI area, it is unlikely to create a tax cliff or under unforeseen consequence.
I just want to make sure I'm not missing something. We have one child and will have close to $15,000 in child care expenses. If I keep contributing to the current DCFSA up to $5,000 max, then wouldn't I still have ($15,000-$5,000) = $10,000 in eligible childcare expenses that I could claim the tax credit for?
JoeQ
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by JoeQ »

20Dukes11 wrote: Wed Apr 21, 2021 7:24 am Morning all,

Another lurker here who is trying to decide whether to adjust my contributions to our current $5,000 limit DCFSA. We've already contributed 4 months' worth ($1,666), but our total AGI is well below $100k (probably somewhere in the high $80s/low $90s). Our childcare expenses for the year will be a little more than $15k.

If my math is correct, I believe our total tax rate would be 22% (Fed) + 5.25% (NC state) + 7.65% (FICA) = 34.9%

Any help would be greatly appreciated - thx!
How many children? If just one:

FSA = $1,666 (8,000 - 1,666) * 0.50 = $3,167 tax credit

FSA = $5,000 (5,000 - 1666) * .3490 = $1,163.57 tax reduction PLUS
(8,000 - 5,000) * 0.50 = $1,500 tax credit = $2,663.57 total benefit

FSA = $10,500 (10,500 - 1,666 ) * .3490 = $3083.07 tax reduction


The obvious disclaimer is that I am not a professional and I don't know about any tax benefits provided by North Carolina.
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20Dukes11
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by 20Dukes11 »

JoeQ wrote: Wed Apr 21, 2021 8:57 am
20Dukes11 wrote: Wed Apr 21, 2021 7:24 am Morning all,

Another lurker here who is trying to decide whether to adjust my contributions to our current $5,000 limit DCFSA. We've already contributed 4 months' worth ($1,666), but our total AGI is well below $100k (probably somewhere in the high $80s/low $90s). Our childcare expenses for the year will be a little more than $15k.

If my math is correct, I believe our total tax rate would be 22% (Fed) + 5.25% (NC state) + 7.65% (FICA) = 34.9%

Any help would be greatly appreciated - thx!
How many children? If just one:

FSA = $1,666 (8,000 - 1,666) * 0.50 = $3,167 tax credit

FSA = $5,000 (5,000 - 1666) * .3490 = $1,163.57 tax reduction PLUS
(8,000 - 5,000) * 0.50 = $1,500 tax credit = $2,663.57 total benefit

FSA = $10,500 (10,500 - 1,666 ) * .3490 = $3083.07 tax reduction


The obvious disclaimer is that I am not a professional and I don't know about any tax benefits provided by North Carolina.
Ahh OK - this explains what I was overlooking/not understanding, thanks. And yes, just one child. No other NC tax benefits that I can think of.

Sounds like I'll be stopping the DCFSA contributions - Thanks to you all!
JoeQ
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by JoeQ »

20Dukes11 wrote: Wed Apr 21, 2021 8:56 am
Beachey wrote: Wed Apr 21, 2021 8:29 am
20Dukes11 wrote: Wed Apr 21, 2021 7:24 am Morning all,

Another lurker here who is trying to decide whether to adjust my contributions to our current $5,000 limit DCFSA. We've already contributed 4 months' worth ($1,666), but our total AGI is well below $100k (probably somewhere in the high $80s/low $90s). Our childcare expenses for the year will be a little more than $15k.

If my math is correct, I believe our total tax rate would be 22% (Fed) + 5.25% (NC state) + 7.65% (FICA) = 34.9%

Any help would be greatly appreciated - thx!
The general consensus would be you would be better off asking your employer to stop the DCFSA contributions and take as much of the tax credit as possible. The only reason you might not want to is this will increase your AGI by ~$3,333. In the $80K/$90K AGI area, it is unlikely to create a tax cliff or under unforeseen consequence.
I just want to make sure I'm not missing something. We have one child and will have close to $15,000 in child care expenses. If I keep contributing to the current DCFSA up to $5,000 max, then wouldn't I still have ($15,000-$5,000) = $10,000 in eligible childcare expenses that I could claim the tax credit for?
The maximum expenses for the credit with one child is $8,000. Your FSA election is subtracted from that $8,000. If you elect $5,000 in FSA, you will only have $3,000 available for the credit, giving you a maximum $1,500 credit.

I haven't plotted every FSA value, but in my fiddling I've noticed that either maxing FSA or stopping FSA is better than leaving FSA at $5,000.

Edit: Here is the 2020 Form 2441 using the updated 2021 values.
Line 27 is the credit base. 3,000/6,000 --> 8,000/16,000
Line 28 = Your FSA election (substitute $5,000 for the example you gave)
Line 29 = The new credit base. $8,000 - $5,000 = $3,000

Image
Last edited by JoeQ on Wed Apr 21, 2021 9:18 am, edited 1 time in total.
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20Dukes11
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by 20Dukes11 »

JoeQ wrote: Wed Apr 21, 2021 9:11 am
The maximum expenses for the credit with one child is $8,000. Your FSA election is subtracted from that $8,000. If you elect $5,000 in FSA, you will only have $3,000 available for the credit, giving you a maximum $1,500 credit.

I haven't plotted every FSA value, but in my fiddling I've noticed that either maxing FSA or stopping FSA is better than leaving FSA at $5,000.
Yep - agreed, I wasn't initially understanding that the FSA election is subtracted from the $8k max. Makes sense now, much appreciated!
JoeQ
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by JoeQ »

20Dukes11 wrote: Wed Apr 21, 2021 9:18 am
JoeQ wrote: Wed Apr 21, 2021 9:11 am
The maximum expenses for the credit with one child is $8,000. Your FSA election is subtracted from that $8,000. If you elect $5,000 in FSA, you will only have $3,000 available for the credit, giving you a maximum $1,500 credit.

I haven't plotted every FSA value, but in my fiddling I've noticed that either maxing FSA or stopping FSA is better than leaving FSA at $5,000.
Yep - agreed, I wasn't initially understanding that the FSA election is subtracted from the $8k max. Makes sense now, much appreciated!
You bet. Just edited my above post with a picture of Form 2441, in case you're curious what it looks like.
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Immafreak
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by Immafreak »

I am having a hard time with this too....

I am filed married filling jointly with two kids and in a state with no state tax. Our AGI will be between 145-155K. The spouse receives a bonus that changes year to year and I get OT from time to time, so its hard to pinpoint an AGI for this year.

I can't decide between maxing out Dependent Care FSA to 10.5k or just leave it at 5K. Work is letting me make that change to 10.5k.

Thanks
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harikaried
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by harikaried »

mwesty wrote: Mon Apr 19, 2021 9:00 pm
mwesty wrote: Sat Apr 10, 2021 8:51 pm Was maxing the DCFSA the right choice? I’m thinking no after reading everything
Our tax advisor got back to us and said to leave the DCFSA @ 5k then take the tax credit fwiw
If you can change the DCFSA amount, you should be able to change it to however much has been funded so far this year if you otherwise would want to have $0 in FSA to maximize the credit.
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harikaried
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by harikaried »

Immafreak wrote: Wed Apr 21, 2021 2:57 pmI am filed married filling jointly with two kids and in a state with no state tax. Our AGI will be between 145-155K.
If you haven't received the rebate, reducing to under $150k joint AGI whether through additional dependent care FSA or retirement contributions can be extremely beneficial to avoid ~100% marginal tax.

However if you have received the rebate, additional FSA dollars reduces the child care credit, which is 37% at $150k AGI and is pretty close to your marginal rate (22% federal + 7.65% FICA + 5% child credit + 8% child care credit), so probably better to max FSA although it gets close.
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FiveK
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by FiveK »

For those interested, the personal finance toolbox (works best in Excel) appears to include the new law provisions for this topic, along with most other common tax considerations, so one can investigate tradeoffs as needed if there is a concern about "our situation is different...".
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ShaftoesSpreadsheet
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by ShaftoesSpreadsheet »

finite_difference wrote: Fri Mar 19, 2021 3:57 pm Should the 7.65% FICA be included? As I understand it, your employer matches these, so that match is lost. And by paying less into Social Security, you get less benefit from Social Security. So wouldn’t that further favor the Dependent Care credit?

If you have expenses less than $4k and one child, it is always better to take the Dependent Care Credit?
We stopped doing our DCAP and Medical Expense Reimbursement Plan accounts because it was reducing my wife's social security credits. Plus the headache of the paperwork on the MERP account.
jdstripling
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by jdstripling »

I am late to this party on the FSA changes. I was told by HR that we would be able to make changes to our FSA contributions after I asked them if we are able to increase it based on the law changes. I think I have a decent understanding for what I should do but would love a second opinion.

MFJ - AGI 167k (after taking 10,500 DCFSA) - 22% federal - 7.85% state (MN) - 7.65% FICA - 2 kids - 25k in DC

For me I believe I should take the full 10,500 DCFSA at a tax rate savings of 37.5% not to mention it should keep me out of the 24% federal tax bracket if I end up with any additional unexpected income at the end of the year.

Additionally, I believe I will also qualify for a reduced portion of the CCTC --- 16,000 - 10,500 = 5,500 *0.28 = $1,540 CCTC

Another benefit of taking the full 10,500 this year that I did not see discussed on this thread is to increase the Child Tax Credit which is different than the Child Care Tax Credit and begins phasing out at 150k for MFJ. Above 150k every $1000 reduced from your AGI adds $50 to the Child Tax Credit.

Can anyone find any errors in my math here?
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FiveK
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by FiveK »

That all looks correct - well done!

The toolbox spreadsheet mentioned a few posts back does include the Child Tax Credit effect.
rascott
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by rascott »

I've played around with this is a spreadsheet a little bit.... and it seems to me that the break even point is around $160k AGI (and this is AGI before accounting for DCFSA contributions)

AGI above that, DCFSA seems the answer.... below that it seems that the tax credit is the way to go.

This is MFJ, obviously.
jdstripling
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by jdstripling »

rascott wrote: Thu May 27, 2021 7:23 am I've played around with this is a spreadsheet a little bit.... and it seems to me that the break even point is around $160k AGI (and this is AGI before accounting for DCFSA contributions)

AGI above that, DCFSA seems the answer.... below that it seems that the tax credit is the way to go.

This is MFJ, obviously.
This is dependent on state income tax rates though. If you live in a state with low or no state income tax the break even point will shift higher since the FSA tax savings decrease making the reduced child care tax credit at higher wages potentially still more beneficial.
rascott
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Re: Skip $10.5k Dependent Care FSA to get $8k Child Care Tax Credit @ 50% daycare expenses in 2021?

Post by rascott »

jdstripling wrote: Sat May 29, 2021 11:33 am
rascott wrote: Thu May 27, 2021 7:23 am I've played around with this is a spreadsheet a little bit.... and it seems to me that the break even point is around $160k AGI (and this is AGI before accounting for DCFSA contributions)

AGI above that, DCFSA seems the answer.... below that it seems that the tax credit is the way to go.

This is MFJ, obviously.
This is dependent on state income tax rates though. If you live in a state with low or no state income tax the break even point will shift higher since the FSA tax savings decrease making the reduced child care tax credit at higher wages potentially still more beneficial.
Yes, it's not exact whatsoever.... but someone in this ballpark is who needs to really crunch the numbers. Quite a bit above/ below this and it seems a pretty clear cut answer.
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