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Dependent-care FSA vs tax credit

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Morningstar article on dependent-care FSA vs tax credit A must-read for anyone with kids in daycare, with a nanny, etc.
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In particular, there are some great examples of how much less is going to be paid in taxes one way vs. other. The dependent care FSA let?s one put away money (through one?s employer) on a pre-tax basis ? pre-income-tax as well as pre-payroll (SS, Medicare) tax ? and use that money to pay for child care costs. Since this saves you on taxes you?d normally pay at your marginal rate, and our progressive tax system means your rate is higher the more you earn, the pre-tax FSA is more valuable the more you earn. The Federal tax credit for child care is lowers your federal taxes (it?s a credit not a deduction) by anywhere between 35% and 20% of up to $3000 for one child or $6000 for two or more. The percentage declines as your AGI goes up, so this is actually more valuable the less you make. Morningstar shows examples at various income rates and offers the rule of thumb that if you are in the 25% bracket (starts at $34,500 single and $69,000 joint), you are probably best off with the FSA, though it is possible to max out your FSA and still have room to use the tax credit as well, especially if you have more than one qualifying dependent.
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David S. Meyers, CFP®
http://www.MeyersMoney.com
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David S Meyers CFP
Fixed a typo or two, and on the copy of this note I put up on the blog, I've added some "more information" links, mainly to the IRS's site. Nevertheless, I highly recommend reading the Morningstar article.
Serves me right typing early in the morning on an iPad...
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David S. Meyers, CFP®
http://www.MeyersMoney.com
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David S Meyers CFP
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stevenricherd


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