If my child's father pays for the daycare expenses through his FSA and I claim them, can I claim the child/dependent care credit even though it wasn't paid by me?

[melakaye]

We are an unmarried a couple and shared 2 biological children. Can we max out his FSA and claim the child/dependent care for both children? Or it is better to just claim the tax credit for both children? He makes over $50k, while I make $30k. Which route should we take? Our daycare fees are around $8,000.

[xmasbaby0]

Do you all live together?

[Opus 17]

How would the childcare fees be split between the two children?

[melakaye]

We all live together. Normally, I claim the kids every year and we split the childcare fees. He just pays me directly and I pay the childcare full from my own account. We just want to know if it'll benefit us more for him to sign up for the FSA through his work as they are offering it for next year.

[Opus 17]

How much are the two children's fees?  $4000 each? Or something else?

[melakaye]

one is $4,100, and the other is $5,850

[Opus 17]

So if you split the kids on different tax returns, he should claim child B only and take a $5000 FSA) and you claim child A and use the child and dependent care credit.  That way $8000 of your expenses will be covered by one or the other tax benefit.  If you claim both kids, he can't use the FSA and only $6000 of your expenses are covered by a tax benefit.

[Opus 17]

 He cannot use an FSA unless he claims the child as a dependent. If he uses the FSA to pay for care and does not claim that child or those children as dependents, then the FSA will be added back to his taxable income and he will lose the benefit of it. 

If you are living together unmarried with two children, then most of the time, your best tax result will be for the parent with the higher income to claim at least one dependent. This allows the parent with the higher income to also claim head of household filing status, which has better rate tax rates than single.    If the parent who pays more than half of the household expenses does not clean at least one dependent, then both parents must file as single and you lose the benefit of head of household status. 

 Whether it would be better for you each to claim one child, or for the higher earner with the FSA to claim both children, would have to be tested using different test tax returns. 

[Opus 17]

Here are some basic principles.

The FSA saves more money than the child and dependent care credit for a single person whose income is more than about  $25,000.  This is because the credit gets smaller as your income gets larger, but the tax savings for an FSA get larger as your income gets larger.

Head of household status is an additional tax saving but you must pay more than half the household expenses (rent, utilities, etc.) and claim at least one qualifying dependent.

An FSA can be used for put o $5000 of expenses no matter how many children you have. The dependent care credit covers $3000 of expenses for one child or $6000 of expenses for 2 children.

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For 2018 tax planning, there are too many moving elements to give a guaranteed answer, but this is my best guess.

Your partner should plan on claiming one child as a dependent, filing head of household, and using an FSA amount equal to the care expense for that child only (let's say $4000 each child).  You plan on claiming the other child as a dependent and using the child  and dependent care credit.  This will cover a total of $7000 of your care expenses ($4000 FSA plus $3000 dependent care credit amount for one child).  This will also make your partner eligible for head of household status and will make you eligible for earned income credit.  The amount of extra EIC you would get for claiming both children will be less than his tax savings for filing as head of household. 

For your care provider, you will need to get separate receipts for each child so he can get the right FSA reimbursement from his employer and you can each prove your care expenses if you are audited.

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For 2017 tax planning, you should test different situations, but my guess is you will do better if you each claim one child dependent.  He can claim head of household filing status and the dependent care credit for one child, you claim single and the dependent care credit for the other child, plus you are probably eligible for EIC.  The alternative situation (he files single with zero dependent and you file with 2 dependents) will give you a larger dependent care credit and maybe more EIC but he will lose a dependent care credit and head of household status.

Like I said, test it both ways.