Daycare (Deduction vs. FSA)

[crystal1588]

How would I go about figuring out which is better for us?
Our daycare costs will be about $7200/year. We itemize at tax time, and we make around 90k/year.

If we did the FSA route, we would each do $150/check into FSA accounts ($300 total/check, $600/month). Otherwise we would pay out of pocket and deduct at tax time.

Math/tax people, Help??

[mrslynch]

i'm not sure i have this 100% correct because we use a dependent care option not a flexible spending account and there may be differences but here goes...

for dependent care, you can only deduct a max of $5000 for one child, which comes to $192 and change per pay check (i think it goes up to $6000 for two or more kids). you can then deduct the balance between that $5000 and what your actual costs are (so $2200). we pay out of pocket 2 weeks per month and use the deduction to cover the other 2 weeks. we get to bank whatever isn't use and we use that money at the end of the year.

you also need to remember that for the dependent care option (ours at least), you cannot use money you have not contributed. so, every two weeks, we only have $192 to use. we need $330, which is how we came to our plan. that, and it's nice to not have to pay daycare out of pocket around holiday time.

i'm sure there are more knowledgable people than me but that's been my experience with our plan.

[973beachbum]

It's been a while for me but I seem to remember that the Dependant care tax credit is only 20% if your income is over about $40K a year. And FSA's max out at about $5K. So we used both. We used the FSA for the first $5K in day care and then clamed the remaining amount which I don't remember on our taxes and filled out the dependant care worksheet tax credit.

Personally I would do a mock up of your taxes using whatever computer program you have for this year and plug in numbers like what I said or other versions. Then see what works out best for you. I know the tax law might changes but it would give you a good idea on how you want to start. Just my 2 cents.

[Deleted]

I haven't run the calcs to see which is better for me. I do $5k in the dependent care FSA because it is easy an convenient.

[commentator]

Mar 23, 2011 12:31:28 GMT -5 @crystal1588 said:

How would I go about figuring out which is better for us?
Our daycare costs will be about $7200/year. We itemize at tax time, and we make around 90k/year.

If we did the FSA route, we would each do $150/check into FSA accounts ($300 total/check, $600/month). Otherwise we would pay out of pocket and deduct at tax time.

Math/tax people, Help??

First, it isn't a deduction at tax time, it's a credit. At your tax level, your credit would be 20% of the eligible amount. On the other hand, your are probably in the 25% tax bracket.

So, which is better, reducing your taxes by 20% of the eligible amount (of $3,000 for one child or $6,000 for 2 or more) or 25% of the amount put into the FSA ($5,000 is the max that can be excluded, by the way, not the $7,200 you're putting in)? Since you didn't say how many kids you have in day care, you tell us.

[ruleof72]

I don't see any negatives to using the FSA payroll deduction

The FSA deduction from your paycheck comes out before SS taxes are calculated so if you go that route you will save $382.50 (5000*7.65%).
Utilizing the FSA paycheck deduction does not preclude you from taking the tax credit on the difference at tax time. If you have 2 children and are eligible for 3000 credit for each you can still take the difference (6000-5000*20%=$200 credit)
The FSA deduction also provides better cash flow as you are reimbursed throughout the year instead of getting a big refund at tax time.

[crystal1588]

My bad, I was under the impression you could do $5000/each into an FSA. I think the best way to do it would be $5000 into an FSA @ 192/paycheck and then do the rest at tax time.

Thanks for the clarification!!

[Clever Username]

My bad, I was under the impression you could do $5000/each into an FSA. I think the best way to do it would be $5000 into an FSA @ 192/paycheck and then do the rest at tax time.

One of the more laughable things the IRS does.
I've got two in daycare full time and another two in summer daycamp.
It's still a tax savings, so I use it.
It's just nowhere near my yearly expense.
I just wish they'd change administration to the way they do medical FSA where reimbursement is lump sum as you incur the expense, not the ongoing per paycheck amount.

[mwcpa]

commentator laid out the rules pretty clear....

remember, the cap on the FSA for dependent care is total for the family...

so, if Dad can elect 5K and Mom can elect 5K you will have exceeded the amount allowed by law... 5K is the max per family.... I have seen a number of clients who did not realize that (or ask me the question beforehand) until they got the tax bill on the extra 5K....

generally, the fsa deduction is better than the credit, if you are in the 25% or higher tax bracket... only elect what you will spend....

also, remember, at tax time, you still need to complete form 2441 and show the IRS the same information that yo supplied to the FSA administrator (name, address, SS# or EIN, $ paid, etc) or you will get a bill from the IRS in about 2 years saying you had a dependent care deduction on your W-2 but no reconciliation... I had a "new" client encounter this when their former preparer did not do the right disclosures.... it took a few back and forths with the IRS to clear up....

[Clever Username]

Mar 23, 2011 12:31:28 GMT -5 @crystal1588 said:

and we make around 90k/year.

They've got calculators online somewhere to help you decide.
But, I'll give you a hint.
Take the FSA, you'll fail the test.

The credit is meant to help low income families afford daycare.
You're probably twice the yearly income of the tipping point.

[Clever Username]

Mar 25, 2011 5:31:58 GMT -5 mwcpa said:

remember, at tax time, you still need to complete form 2441

Funny, I was digging through old tax records for these just last night.
My home daycare provider asked my wife to kindly pull up how much we've paid her since 2004.
Sure enough, it was easy as pie.

She's loving and wonderfull, just not a wiz with the paperwork.
I know she stresses about tax time, but I never imagined she was THAT far behind.