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Dependent Care FSA and Child Care Credit Questions?

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  • Dependent Care FSA and Child Care Credit Questions?

    My wife and I are expecting our first child next month and we are addressing open enrollment for next year. One of the options is a Dependent Care FSA. I am trying to wrap my head around this option and also the "Child and Dependent Care Credit." Any thoughts would be appreciated.

    Background:
    -Starting in February, my wife will go back to work part time. Her current annual income is about $100k but will likely be reduced to ~$50k when she goes part time.
    -For 2017, we will have one child.
    -I will be on a resident's salary, making ~$53k
    -Her employer offers the option to contribute up to $5k to a Dependent Care FSA

    Questions:
    1) Is there a comprehensive list of what constitutes "childcare expenses?" I'm assuming daycare expenses are an obvious, but what about all of the other miscellaneous expenses that we'll have to pay so my wife can continue to work. Food, clothing, education, camps, transportation, etc...
    2) My understanding is that my contributions to the Dependent Care FSA will reduce the "Child Care Credit." Which is more valuable? For instance, if we expect to spend $4k in childcare expenses, should $4k go into the FSA or should it be $3k and the other $1k for the credit? What about if we spend $8k a year in child expenses (essentially anything over $5k max for FSA).
    3) Are we able to pay family members for childcare that counts towards this benefit? For instance, if I pay my mother $8k to watch out son, can that be paid via the FSA or can it count towards the Child Credit? What if I pay her "under the table?" How would that work?

    Thanks.

  • #2

    1. You have to choose 1 option; cannot split your money between the 2.

    2. For 2016, you'll want to contribute to the FSA, of course.

    3. For 2017, you'll get a maximum of $3,000 tax credit (20% of costs up to $15k).

    4. At $100k taxable income for 2017, you'll be in the 15% tax bracket. The FSA will save you around $1,500 unless it also reduces state income tax.

    5. The answer depends upon what you pay for child care.


    What counts for day care:

    1. You must report the payment amount and identifying information for the child care provider to qualify for the child care credit. Paying your mother under the table is a no-no.

    2. Nursery school, preschool, and similar pre-kindergarten programs qualify as child care as long as it is to allow both parents to work.

    3. Expenses for before- and/or after-school care of a child in kindergarten or higher grade can be considered child care.

    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      jfox,

      I pay $6,000 annually for after school child care expenses for my grand-nieces. This works great whenever their mother (my niece ) goes back to jail; her daughters enjoy continuity of care without disruption. Can I deduct the after school child care expenses  ?

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      • #4




        jfox,

        I pay $6,000 annually for after school child care expenses for my grand-nieces. This works great whenever their mother (my niece ) goes back to jail; her daughters enjoy continuity of care without disruption. Can I deduct the after school child care expenses  ?
        Click to expand...


        No. I am touched by your kindness to your grandnieces, but this qualifies as a gift. The expense must be paid for a dependent and for the purpose of allowing you to do paid work to be used for the credit. Education expenses are not deductible until the child goes to college.

        Just a thought - would your grandnieces qualify as dependents? It may be possible under a "multiple support agreement". You have to furnish at least 10% of the support and the others who pay support must agree on who gets the exemption. More here.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          jfox,  Wow!  the multiple support declaration is interesting, but my situation fails the #3 criteria,  "no one alone paid more than half of that person's support."  Their grandmother, my sister, pays for all of their support with the exception of school tuition and after school care, which I pay.

          Interesting thought, thanks.

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          • #6
            Are flex account contributions which come out pre-paycheck not subject to FICA as well as fed withholding?  I had this question coming from a friend the other day who had people swear they were saving $3,000 a year by using $5,000 pre-tax who were not in a very high bracket, and excluding state taxes or them being totally wrong (def possible), I was wondering if this could account for an additional $382.50 (7.65% of 5k).

            Excluding the pre-tax money spent via the flex account, the remainder can be claimed for the CDCC, right?  So if we spend $1,000/mo ($12,000/yr) on day care, and $5,000 comes from the FSA, then the remaining $7,000 can be claimed for a credit of $1,400 (20%), right?  This is based on https://www.irs.gov/taxtopics/tc602.html.

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