I’m about to enroll my son in an after-school-care program for the new school year and was wondering if I can use money from my child-care flexible-spending account to pay for that program or if it qualifies for the child-care tax credit? Which would be better to use -- the FSA or the child-care credit?
If your son is under 13 and you’re signing him up for after-school care so you can work or look for work (if you are married, your spouse must also work or be a full-time student), then the expense is eligible for the dependent-care tax credit or for reimbursement from a dependent-care flexible spending account.
Any expenses for child care in that situation can count, including the cost of before-school and after-school-care programs, nannies or babysitters, and day camp during the summer and school vacations. The cost of day care or preschool qualifies, too, until the child reaches kindergarten (at that point, only the cost of care while the child isn’t in school counts). See Flex Funds for Summer Camp for more information.
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If your employer offers a dependent-care FSA, that’s usually your best bet. You can set aside up to $5,000 per year per family in an account that escapes federal taxes as well as Social Security and Medicare taxes. FSA contributions avoid state income taxes, too. The higher your tax bracket, the greater your savings. If your combined tax rate is 30%, for example, running $5,000 through your FSA would reduce your tax bill by $1,500.
Normally, you must determine your FSA contributions before the start of the new year, and you usually have to spend all of the money by the end of the year (or by March 15 of the following year, if your employer offers a grace period). Otherwise, you’ll forfeit the unused funds. But some employers allow you to make changes to your dependent-care FSA contributions throughout the year if you have a change in child-care expenses.
The child-care credit can be helpful if you don’t have a dependent-care FSA at work or if your income is very low. You can take a tax credit worth 20% to 35% of the cost of care, up to $3,000 for one child or up to $6,000 for two or more children. The higher your income, the lower the credit -- to qualify for the maximum 35% credit, your adjusted gross income must be less than $15,000. You’ll be able to take the 20% credit if your income is above $43,000. If you pay $5,000 in child-care expenses for two or more children, the 20% credit would cut your tax bill by $1,000.
You may be able to benefit from both options if you have child-care expenses of at least $6,000 for two or more children. You can use the $5,000 in child-care expenses from the FSA and claim the child care credit for the additional $1,000 of daycare expenses, which could lower your tax bill by another $200.
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