I paid child-care expenses of $14,300 for my two children in 2015 and used my dependent-care flexible-spending account at work for $5,000 of those costs. My tax software is saying I can only take $200 for the dependent-care tax credit for 2015 (my taxable income was $115,000). Is that correct?
Your tax software is correct. Even though you had child-care expenses beyond the $5,000 you paid for from the FSA, you can only count $1,000 of those extra expenses toward the credit. At your income level, that translates into a credit of $200.
The dependent-care tax credit is based on up to $3,000 in child-care expenses if you have one child or $6,000 if you have two or more children. The children must be no older than 12, and the care must be provided so you and your spouse can work or look for work (or so one spouse can attend school full-time while the other works). The dependent-care FSA lets employees set aside up to $5,000 in pretax money for child-care expenses, with the same definition of eligible expenses.
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The way the child-care credit is calculated, the amount of money you set aside pretax in your employer’s dependent-care FSA must be subtracted from the $3,000 or $6,000 in eligible expenses for the dependent-care credit. That means if you contributed the maximum $5,000 to your dependent-care FSA at work and have just one child, you won’t be eligible to take the dependent-care credit, too. But if you have two or more children, you can max out your FSA and still take the tax credit for up to $1,000 of eligible expenses.
The size of that tax credit depends on your income. The credit is worth 20% to 35% of your eligible child-care expenses (up to the $3,000 for one child or $6,000 for two children). The higher your income, the smaller the percentage. If your income is more than $43,000, for example, the credit is worth 20% of your eligible expenses (the income limits are the same, whether you’re filing as single, head of household, or married filing jointly). Since you can take the credit for $1,000 of eligible expenses and earn more than $43,000, you qualify for a credit of $200. You can calculate the credit using IRS Form 2441, Child and Dependent Care Expenses.
Eligible child-care expenses include the cost of day care, a nanny or a babysitter while you work, as well as preschool (but not the cost of school for children in kindergarten or higher grades). You can also count the cost of before-school or after-school care and day camp during the summer and school breaks if using them allows you to work.
For more information about the eligible expenses and calculations, see IRS Publication 503, Child and Dependent Care Expenses. See The Best Way to Get a Tax Break for Child Care Costs for more information about the advantages of the dependent-care FSA versus the child-care credit (you’ll generally come out ahead if you max out the dependent-care FSA first, especially if you have a high income ).
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