Dependent care through employers

[Jenny_91923]

When would you use dependent care through your employers - when it is offered and you have dependent care expense and can reasonably estimate how much expense you will have.

Why would you use dependent care through your employer -there are two major benefits of the credit:

1. This is a tax credit, rather than a tax deduction. A tax deduction simply reduces the amount of income that you must pay tax on. A $1,000 deduction, for example, might reduce your tax bill by only $150 or $200 depending on your tax bracket. A tax credit, however, directly reduces your taxes, dollar for dollar. A $1,000 tax credit cuts your tax bill by $1,000.
2. A lot of tax breaks have income limits and are not available at all to people with incomes above those limits. In most years you can claim the credit regardless of your income. The Child and Dependent Care Credit does get smaller at higher incomes, but it doesn't disappear - except for 2021. In 2021, the credit is unavailable for any taxpayer with adjusted gross income over $438,000.

For more details, please take a look at this link: https://turbotax.intuit.com/tax-tips/family/the-ins-and-outs-of-the-child-and-dependent-care-tax-cre...

[mfields2 · Accepted solution]

Dependent care accounts allow you to pay for child care expenses through an account set up at work.   The money is set aside on a pre-tax basis, which lowers your taxable income.  In general, you have the choice between having pre-tax money pay for your childcare and getting the dependent care credit for amounts spent for childcare.  

Which is better for you? Each one has advantages and disadvantages.  Working through your employer generally means you have to use licensed providers that meet their specifications, and the process of getting your money "out" of the account can be cumbersome.  Some dependent care accounts won't let you pay individuals, for instance.  I would definitely understand what limitations on the accounts exist before signing up for it, in case your child care providers are not eligible to be paid from a dependent care account.  

In terms of tax benefits, there is also advantages and disadvantages.  While it is easy to calculate if you get more benefit from the credit than from the pre-tax treatment of your income, if you qualify for any of the following benefits, you might have to consider the effect of a change in your taxable income and how that change will affect your tax return:  Earned Income Credit, Credit for Qualified Retirement Savings (retirement plan contribution credit), Student Loan interest deduction, Education credits (American Opportunity and Lifetime Learning credits), Premium Tax Credits (getting your health insurance from the ACA or Obamacare exchanges), IRA deductions, or a host of other tax credits and deductions that are dependent on your overall income.  This is really hard to know a year in advance (like in November when you are signing up for next year's dependent care account), but you might have a pretty good idea if you may use some of these tax breaks and and it is good to consider how a overall change in your taxable income might affect other credits.