If you have children, you know that the price of raising them and giving them the best life adds up quickly. However, there are ways you can save on certain expenses. Two of the most common options are a Dependent Care FSA or the child care tax credit.
To decide which one to use, it’s important to understand the differences between them.
What’s the difference?
Dependent Care FSA
A Dependent Care Flexible Spending Account (DC FSA) helps employees pay for eligible child care expenses by reducing taxable income through payroll deductions. Employees who choose to participate in the plan can set aside up to $5,000 in the account every year toward qualifying child care expenses. The savings vary depending on which tax bracket an employee is in. You can review which services are eligible under a Dependent Care FSA by following this link.
Child Care Tax Credit
The child care tax credit is another tool parents can use to pay for qualifying child care expenses. Unlike the DC FSA, the child care tax credit, as it’s name implies, is not a deduction but a credit. The child care tax credit allows parents meeting certain criteria to set aside money for qualifying child care expenses. (Read more about the requirements here).
Can I use both?
In some cases, you may be able to take advantage of both.
If you have two or more eligible dependents receiving eligible care, you may set aside up to $5,000 in a Dependent Care FSA and claim $1,000 of the child and dependent care tax credit.
A dependent is:
- an individual who is under 13 years old and for whom you can claim an exemption. (If divorced or separated, see special regulations in IRS Publication 503.)
- a spouse or dependent who is physically or mentally incapable of self-care and for whom you can claim an exemption
Which one will save me more money?
Your particular tax situation will affect which option makes more sense.
Factors to consider include:
- your income
- your tax bracket
- how many dependents you have
Generally, those with lower income levels (under $30,000 annually) will see a greater advantage to using the Child and Dependent Care Credit. As your income level increases, the advantages become greater under the Dependent Care FSA.
If you are unsure of which option is more beneficial for your particular tax situation, consult a tax professional.