Will an FSA contribution increase my earned income credit?

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bigtex
Posts: 301
Joined: Fri Jan 26, 2018 10:34 am

Will an FSA contribution increase my earned income credit?

Post by bigtex »

Hello, tax question. I already qualify for the EIC credit based in my income. If I also start contributing to an FSA through my employer, would that increase my EIC even more since I am lowering my income even more. My taxable income before considering the FSA is like $47-$48k. I have three kids.
FoolishJumper
Posts: 286
Joined: Wed Aug 05, 2009 3:48 am
Location: Chicago

Re: Will an FSA contribution increase my earned income credit?

Post by FoolishJumper »

Yes it will. The earned income credit is based on your AGI (adjusted gross income). Both 401k contributions and FSA contributions reduce your AGI, so assuming you are on the falling side of the EIC credit (greater than ~$25,000 with three kids based on the 2019 numbers at the top of my head), then you will increase your EIC if you are able to decrease your AGI.

All that said, the amount of the EIC increase is less than the amount of the AGI decrease, so you still only want to contribute to an FSA if you know you will use it - which means the FSA contribution should really be independent of your EIC or EIC amount - if you have medical expenses that are eligible for an FSA, then you should absolutely make use of it for the tax savings alone!
cshell2
Posts: 481
Joined: Thu May 09, 2019 10:29 am

Re: Will an FSA contribution increase my earned income credit?

Post by cshell2 »

If you're in earned income credit range, every dollar you can reduce your income will increase your credit about 20 cents. But, like pp stated, you don't want to overfund your FSA either. If you haven't maxed your 401K, that would be another option to up the EIC.
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