Recently a friend called up and said he is going through Open Enrollment in November and not sure about his FSA usage for dependent care.
His child is in kinder garden and may not use full day child care. He might use child care for those summer vacation days. Depending on the situation it might be too early to decide on the child care for the summer.
If you plan to use money from FSA for dependent care, it has to be a full day day care. So with that uncertainty, what do we do ?
For FSA Dependent care, the money you place in FSA, it escapes Federal, State, Social security and Medicare taxes. So if you place $5000.00 in FSA account, and you are in 30% tax bracket, you might save $1500.00 in taxes.
For Dependent care credit, you get a tax credit of a percentage of your dependent care expenses on your tax return. This percentage varies based on your adjusted gross income (AGI). The higher the AGI, the lesser the dependent care credit and the credit might disappear beyond certain income range. It largely varies depending your situation.
- Kiplinger has good article that compares these two.
- Turbotax has a article that mentions the limits and how your dependent care credit reduces based on your AGI.
Overall, FSA works best irrespective of AGI limits. Dependent care credit mostly works better for low income families that don’t have FSA provided by their employer.