Child care and fsa dependent care credit help

[jjones0377]

This question will be for 2019 taxes. As I’m doing benefits for work for next year. For the dependent care credit, I understand it’s a maximum of $3,000 per child.  We have 2 children. One we will only spend about $600 next year on the oldest child and $8,320 for the youngest child.   Grand total of $8,920. For child 1, we can only write off her $600.  For child 2, we can only write off $3,000.  Total write off of $3,600.  If we were to sign up for the FSA dependent care for a maximum value of $5,000 how would this work.  

 1) We claim the $5000, and then at tax time in 2019, claim an additional $1,000 since we are claiming 2 kids with daycare?

 2) We claim the $5000, and then at tax time we get taxed on the difference between what we really paid per child ($3k and $600) so 1400 of the 5k we paid will be taxed since only 3k per child max.

Or am I missing something here. Just want to make sure we sign up for the proper benefits.  Our income together will be around 110k (pretax and prebenefits)

[Opus 17 · Accepted solution]

UPDATE: Although this post is dated 2019, it was only imported into the new forum on that day and it is actually for a prior tax season.  After the tax cuts and jobs act of 2018, the comparison of FSA versus dependent care credit is much cloudier.  Unless you’re in a very high tax state like California, the FSA and dependent care credit come out almost exactly equal for almost everyone claiming expenses for two or more children.  Most of the time there is only a few dollars difference over the year. With one child, the FSA is still the better option. With two children, most people should make their decision based on convenience, and on whether they think they will use the entire FSA and not lose it, rather than on the net dollar amount of savings, which will be almost identical.

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First of all, the limit is $6000 when you provide care for two or more children, it is not $3000 per child. So you would be eligible for the full amount. 

Second, the FSA is better for anyone whose income is more than about $20,000.  By taking the FSA, you will pay the first $5000 of expenses with tax-free money.  The next $1000 of expenses will be eligible for the credit.  Expenses over $6000 are just costs you pay without offsetting tax benefits.

This assumes that the tax laws don't change or that any changes will take effect after 2018.

[jjones0377]

Ok great. That’s what I assumed there. The first 5k is tax free then the remainder would be claimed on the dependent care as An additional $1000.    Would it be possible to claim $3000 each on the dependent care credit instead of doing the FSA. I can’t recall. Does it split up the amount on a per kid basis. Or when I enter my amount paid for each kid. Does it just combine it? So one kid I enter the 8320 and the other I enter 600. Will it lump them together then give me the 6k credit? Or will it give me 3k for one child and 600 for the other child? I hope that makes sense. I know what I mean. Ha!

[Opus 17]

The dependent care credit does not care how the money is spent, the maximum eligible expenses are $6000 for two children, so you would report $6000 of eligible expenses even if you paid $600 for one child and $8000 for the other child.

However, the credit is not the full $6000 of eligible expenses, it is a percentage.  35% at low income gradually dropping to 20% at higher income.  Meanwhile, your income tax is 10-15% at low income increasing to 25% at higher levels.  And the FSA saves you 7.65% social security and medicare tax and it saves you on state income tax (3-10% depending on your state and income).  Which is why the FSA will save you more money if your overall income is more than $20,000.  The FSA saves you 15% + 7.65% +5%; or 25% +7.65% plus 5%, while the credit saves you 20%.  If you have more than $5000 of eligible expenses, the tax form will automatically put the last $1000 toward the dependent care credit of 20%.

The only reason to prefer the credit over the FSA is if you are worried that your circumstances will change and you won't spend the full $5000, because unspent money in the FSA is forfeit, or if your income is less than $20,000, so that the credit (30-35%) is more than your tax savings (27.5%).

[jjones0377]

We will spend much more than the $5,000. Our situation will change, but only for the oldest one who’s care is currently 1800 a year it will be dropping to $600 next year. So I tried to account for that in my calculations. So looks like I need to do the FSA. But we won’t get a tax break at tax time as we are basically taking the tax break throughout the year, if I understand this correctly.

[Opus 17]

You won't get a big refund if that's what you are looking for.  What will happen is, each week, you will be depositing $100 into the care account while your take-home pay only goes down by $65 or $70.   That's where you will see the tax savings. If you also want a large refund, you can adjust your W-4 to have that extra $30 taken out of your check each week, which would then come back to you as a tax refund.