Dependent Care FSA vs Child Care Tax Credit

[j_orban]

How would I decide whether it is more advantageous to enroll in a DCFSA in 2022 or take the tax credit? Also, can you free file if you are claiming the tax credit?

[Donna F 77]

The FSA can be used on a max of $5,000 of expenses regardless of number of children unless the law changes for 2022.  This lowers your income by $5,000 since it is a pre-tax deduction.  The FSA would save you your tax rate multiplied by the $5,000.

For 2021, the dependent care credit covers a maximum of $4,000 expenses for one child or $8,000 for two or more.  The credit is subject to a percentage based on your income level.  The maximum percentage is 50% of the dependent care expenses paid (maximum savings of $4,000).  These amounts are subject to change for 2022.

[Opus 17]

@Donna F 77 

The taxpayer is asking about 2022, not 2021.  Also, I believe your dollar amounts for 2021 are incorrect.  For 2021, I believe the maximum FSA is $10,500 and the maximum expenses for the care credit are $8000 and $16,000.

See here.

https://www.irs.gov/pub/irs-dft/f2441--dft.pdf

[Opus 17]

@j_orban 

Good afternoon!

Your question is tricky because Congress has a tendency to change the tax laws at (or after) the last minute.  I think the Build Back Better plan extends the special rules for 2021 into 2022.  But, it seems that the BBB is not likely to pass the Senate in its current form, so there's really no way to guarantee what will happen next year.

For 2021, the credit is better unless your income is more than $125,000.  After that it gets tricky to figure out.  But the credit is 50% of child care cost if your income is below $125,000 and the FSA would only save about 33% (22% federal tax plus 7.65% social security and medicare plus whatever you pay in state tax.)

For 2022, assuming the credit reverts to the old formula, the FSA is better if you are paying for care for one qualifying child.  The FSA and the credit are about the same if you are paying for care for 2 or more children, assuming you are in a state that also has a child and dependent care credit.  If you are in state that does not have a child and dependent care credit and also has state income tax, then the FSA is slightly better.  

If Congress changes the law and increases the credit for 2022 at the last minute, the IRS may grant a waiver allowing people who took the FSA to adjust their contributions or cancel mid-year (which they did for 2021).  Or, if you pick a $5000 FSA for 2022 and then Congress keeps the enhanced credit ($8000 or $16000 of costs) you can still claim the credit for costs that exceeds your FSA. 

The child and dependent credit is not included in Turbotax Online's Free version, it requires at least Deluxe.

https://turbotax.intuit.com/personal-taxes/online/free-edition.jsp#tax-forms

[Donna F 77]

Thanks Opus 17!  I apologize for getting the limits incorrect.  I was looking at 2020 since 2021 was changed by the American Rescue Plan Act.  I was trying to relay that 2022 amounts are not final yet, but didn't express my thoughts clearly.