Dependent Care FSA vs Dependent Care Tax Credit?

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auggiedoggies
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Dependent Care FSA vs Dependent Care Tax Credit?

Post by auggiedoggies » Thu Nov 03, 2016 9:39 am

Relevant stats:


Married filing Jointly. Gross income of 130k. We live in MN. Our effective tax rate last year was ~25%


We will have wages paid to our nanny of approximately 15k for the year for the care of 1 child.



So, my question is, is it better to max out the Dependent Care FSA ($5000) or take the Dependent Care Tax Credit (20% of our total amount paid up to 3k)?



My understanding is that whatever we put in the FSA avoids tax, so that would save us about $1,250, right? Or am I missing some additional tax? But the credit could save us $3,000 as a direct credit on our taxes? What am I missing here? I read a few articles that said the FSA is the way to go, but based on this math, the credit seems to be the better option.

RudyS
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by RudyS » Thu Nov 03, 2016 9:56 am

Dependent Care CREDIT is 20% of the $3000. So, $600 (depends a bit on your AGI but this seems right for you). FSA will do more for you.
Last edited by RudyS on Thu Nov 03, 2016 9:57 am, edited 1 time in total.

scophreak
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by scophreak » Thu Nov 03, 2016 9:57 am

Not quite correct. The credit is actually calculated as a percentage (~20-35%) of your expenses (which are capped at $3000/one child, $6000/2+ children), dependent on your AGI. In your example, your credit would actually be 20% of $3000 = $600 credit. Thus, the Dependent Care FSA brings you out ahead for the year.

pshonore
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by pshonore » Thu Nov 03, 2016 10:02 am

DCFSA is pre-tax , pre FICA and pre State tax (usually) so savings could be 32.65% + state marginal rate. Assumes you are under the SS earnings cap of approx 127K

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Kosmo
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by Kosmo » Thu Nov 03, 2016 10:04 am

Dependent care FSA is the way to go. It saves fed/state income taxes and FICA taxes. The alternative is 20% of $3k reduction in taxes = $600, not 20% of the amount paid up to $3k.

auggiedoggies
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by auggiedoggies » Thu Nov 03, 2016 10:13 am

Thank you everyone!! I totally misunderstood it. Time to max out the FSA!

clutchied
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by clutchied » Thu Nov 03, 2016 11:18 am

auggiedoggies wrote:Thank you everyone!! I totally misunderstood it. Time to max out the FSA!
I'm suprised more people don't max it out. It's such a sweet deal!

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Hub
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by Hub » Thu Nov 03, 2016 2:14 pm

clutchied wrote:
auggiedoggies wrote:Thank you everyone!! I totally misunderstood it. Time to max out the FSA!
I'm suprised more people don't max it out. It's such a sweet deal!
I chose not to when I was in the 15% marginal tax bracket with 2 kids. Just wasn't worth the extra hassle for what I think amounted to about a 2.65% advantage. Now that I'm in the 25% bracket I'm thinking I need to reconsider.

Running my numbers, it appears the FSA savings would be 32.65% vs the 20% tax savings for the same $5k taking the dependent care credit. BUT I get employee profit sharing of 11% of my Box 1 from my W-2 so I would get penalized 11% of that money that went to FSA. This gets me back to just a 1.65% advantage to max the FSA so I'm not going to mess with it again.

mikep
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by mikep » Thu Nov 03, 2016 2:26 pm

Hub wrote:
clutchied wrote:
auggiedoggies wrote:Thank you everyone!! I totally misunderstood it. Time to max out the FSA!
I'm suprised more people don't max it out. It's such a sweet deal!
I chose not to when I was in the 15% marginal tax bracket with 2 kids. Just wasn't worth the extra hassle for what I think amounted to about a 2.65% advantage. Now that I'm in the 25% bracket I'm thinking I need to reconsider.

Running my numbers, it appears the FSA savings would be 32.65% vs the 20% tax savings for the same $5k taking the dependent care credit. BUT I get employee profit sharing of 11% of my Box 1 from my W-2 so I would get penalized 11% of that money that went to FSA. This gets me back to just a 1.65% advantage to max the FSA so I'm not going to mess with it again.
The credit caps at $3000, where the FSA is $5000, so you have to include that in your comparison. I would also feed back to your employer they shouldn't calculate profit sharing that way.
Last edited by mikep on Thu Nov 03, 2016 2:28 pm, edited 1 time in total.

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Hub
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by Hub » Thu Nov 03, 2016 2:27 pm

mikep wrote:
The credit caps at $3000, where the FSA is $5000, so you have to include that in your comparison.
6k cap for 2+ kids.

mikep
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by mikep » Thu Nov 03, 2016 2:29 pm

Hub wrote:
mikep wrote:
The credit caps at $3000, where the FSA is $5000, so you have to include that in your comparison.
6k cap for 2+ kids.
Yes, with 2 kids, you could use FSA for $5000 and take the credit for the last $1000. OP had 1 child.

RudyS
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by RudyS » Thu Nov 03, 2016 3:19 pm

The dependent care tax credit is 20% of the $3000 max (per kid, max of 2 kids).

pshonore
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by pshonore » Thu Nov 03, 2016 5:48 pm

RudyS wrote:The dependent care tax credit is 20% of the $3000 max (per kid, max of 2 kids).
Actually it varies by income but "bottoms out" at 20%.

Ron Ronnerson
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by Ron Ronnerson » Thu Nov 03, 2016 10:31 pm

The FSA may be even more beneficial in your case. If you happen to be in the child tax credit phase-out, you can lower your AGI by putting money into an FSA. If you have one kid, the phaseout is for incomes between $110k-$130k. You get the full $1,000 child tax credit if your AGI is beneath $110k but lose $50 of the credit for each $1000 of increased income. Above $130k, you don't get any of the credit. Things like putting money into a 401k and FSA reduce your AGI.

I'll use my own numbers as an example. This is our best guess for what next year will look like for us:
Our (married filing jointly) gross income should be about $145k
I'll contribute $10,460 toward a pension, $440 for dental insurance which will be deducted from my paycheck, $18k toward a 457b, 1K for a health FSA, $5k for a dependent care FSA, and $250 for educator expenses.
These add up to $35,150 and will lower our AGI to 109,850, making us eligible to get the full child tax credit. If our income is slightly higher, we'll fall into the phase-out.

Overall tax savings from the FSA in our case:
25% federal taxes
8% state taxes
1.45% medicare tax
5% child tax credit (since we'd be in the phase-out if we weren't using the FSA accounts)
I don't pay into social security so can't save on that but it's still an almost 40% savings. That's a much higher amount than the $600 that the dependent care tax credit offers.

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Hub
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Re: Dependent Care FSA vs Dependent Care Tax Credit?

Post by Hub » Fri Nov 04, 2016 10:20 am

Excellent point regarding the phase-out range of AGI. I hadn't considered that, but it could affect me also.

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