Tax help-please educate me

[Anonymous]

OP here. I dont have a child care flex account or savings. This is all news to me and if it wasn't for Turbotax asking me what i paid in childcare expenses, i would not know this existed. I need to be educated on this.

[Anonymous]

Anonymous wrote:OP here. I dont have a child care flex account or savings. This is all news to me and if it wasn't for Turbotax asking me what i paid in childcare expenses, i would not know this existed. I need to be educated on this.

It's a flexible spending plan available through your employer. You have to elect to participate, but once you do, they will withdraw up to $5k (you can set a lower amount) from your paycheck pre-taxes and put it into a separate account. You can then withdraw the money from that account by submitting a claim for your childcare expenses - you just fill out and form and send in your invoice or receipt from your provider. The savings comes in because it reduces your taxable income - i.e., that $5k is excluded from the income amount upon which your taxes are calculated (similar to how the money you put in a 401k is excluded from your taxable income). You can ask your HR if there is a plan available at your workplace.

[Anonymous]

Anonymous wrote:

Anonymous wrote:OP, if you used a pre-tax savings account for childcare expenses, you can't use the tax credit being discussed. It's one or the other. If you have the option to use a pre-tax savings account in the future, it would probably save you more money than the tax credit at your income level.

This is not 100% correct. You cannot claim the same expenses for both, but since most people in this area end up paying more than $5k for child care, it often works out that you can fully fund your FSA and also get some of the credit as well. We have two in child care, fully fund our FSA and we still get a decent credit. And we are pretty high-earning so we are phased to the lesser amount of the credit. I'd have to go back through the Turbo Tax section on it, but I think it really helps that we have 2 kids.

Are you sure about the underlined part? I think it's one or the other. See the "Randall" example on page 11 of this IRS publication: http://www.irs.gov/pub/irs-pdf/p503.pdf

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, if you used a pre-tax savings account for childcare expenses, you can't use the tax credit being discussed. It's one or the other. If you have the option to use a pre-tax savings account in the future, it would probably save you more money than the tax credit at your income level.

This is not 100% correct. You cannot claim the same expenses for both, but since most people in this area end up paying more than $5k for child care, it often works out that you can fully fund your FSA and also get some of the credit as well. We have two in child care, fully fund our FSA and we still get a decent credit. And we are pretty high-earning so we are phased to the lesser amount of the credit. I'd have to go back through the Turbo Tax section on it, but I think it really helps that we have 2 kids.

Are you sure about the underlined part? I think it's one or the other. See the "Randall" example on page 11 of this IRS publication: http://www.irs.gov/pub/irs-pdf/p503.pdf

That example shows exactly what I'm talking about, however inartfully I stated it above. Randal gets the credit, but it is greatly reduced by the fact that he contributed to the FSA. The maximum allowable expenses for 2 working parents is $6k. Randall has to reduce that by $5k to account for the FSA constribution. So Randall calculates the credit based on a $1k amount. But he still gets the credit. So for most of us in this area, we are allowed 20% of the allowable amount (because most incomes are more than $43k) - so under this scenario, a $200 credit. I do my taxes with Turbo Tax, and have always gotten the credit despite having made the full FSA contribution.

[Anonymous]

14:05 again - I think I should have said the allowable amount for two (or more) kids is $6k.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, if you used a pre-tax savings account for childcare expenses, you can't use the tax credit being discussed. It's one or the other. If you have the option to use a pre-tax savings account in the future, it would probably save you more money than the tax credit at your income level.

This is not 100% correct. You cannot claim the same expenses for both, but since most people in this area end up paying more than $5k for child care, it often works out that you can fully fund your FSA and also get some of the credit as well. We have two in child care, fully fund our FSA and we still get a decent credit. And we are pretty high-earning so we are phased to the lesser amount of the credit. I'd have to go back through the Turbo Tax section on it, but I think it really helps that we have 2 kids.

Are you sure about the underlined part? I think it's one or the other. See the "Randall" example on page 11 of this IRS publication: http://www.irs.gov/pub/irs-pdf/p503.pdf

That example shows exactly what I'm talking about, however inartfully I stated it above. Randal gets the credit, but it is greatly reduced by the fact that he contributed to the FSA. The maximum allowable expenses for 2 working parents is $6k. Randall has to reduce that by $5k to account for the FSA constribution. So Randall calculates the credit based on a $1k amount. But he still gets the credit. So for most of us in this area, we are allowed 20% of the allowable amount (because most incomes are more than $43k) - so under this scenario, a $200 credit. I do my taxes with Turbo Tax, and have always gotten the credit despite having made the full FSA contribution.

14:05 is right. But it only works if you have 2 kids. If you have 1 kid, the FSA wipes out the credit. If you have more than 2 kids, you still only get the $200 credit.

[Anonymous]

Wow! I really should be using the dependent care FSA. I thought it was essentially the same benefit.

I guess I'll have to wait for open enrollment next year.

[Anonymous]

Another benefit of the FSA is that if you have one spouse that makes under the maximum taxable amount for social security (It is $117,000 this year), have them contribute to the FSA rather than the higher income spouse. Doing it this way, you will also save on the social security payroll tax on the $5,000 contribution. That will save you another few hundred dollars.