Dependent Care FSA or Child Care Tax Credit?

Posted by BAS - 11 June, 2020

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Employees who work for employers that offer a dependent day care flexible spending account plan may be faced with the choice of participating in the FSA or taking the IRS child care tax credit. Employees should determine which option makes the most financial sense for their situation.

For both tax-savings vehicles, a “dependent” is a taxpayer’s dependent who is under age 13 when the care is provided or the taxpayer’s spouse or other family member who is physically or mentally unable to care for themselves.

For the dependent care tax credit, the person must live with the taxpayer for 6 months or more. For an FSA expense to be reimbursed, the dependent must spend at least 8 hours a day in the taxpayer’s home.

Taxpayers who pay for daycare expenses for eligible individuals may be able to claim a tax credit up to 35% of their costs, subject to certain limitations. Dependent Care FSA participants may typically contribute on a pre-tax basis up to $5,000 (depending on plan terms) to be reimbursed for eligible expenses.

The IRS provides resources to determine eligibility for the tax credit. Employees can click here to visit this link to see if they are eligible. If eligible, an employee may wish to compare the projected tax savings using the credit to the tax savings by putting money into a dependent day care FSA.

Topics: HR & Benefits Compliance


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