Flexible spending (cafetieria plan) option: Good or bad?

Question

I signed up for a dependent care FSA this year. The total amount available per calendar year is $5000.00 and I chose the whole amount. I get paid weekly, so, I have $96.15 taken out of each paycheck.

My son's daycare is $145 per week. I know that I will use the $5000 prior to year end so am not worried about "using it or losing it". However, I was wondering if this is a good plan and how it will affect my child tax credits when I do my tax return next year? Also want to know if this account can also be used for my son's medical prescriptions & Dr. visits? I heard that you may not be able to if you have only a dependent care plan set up.

Do you ultimately feel the FSA is a good advantage and why?

Thanks

Answer 1

You cannot use FSA-Dependant Daycare for Unreimbursed Medical Expenses (UME). However, if your employer offers an FSA for daycare, they probably also offer a similar program for UME (either a cafeteria plan or a Health Savings Acct).

This program will not effect your Child Tax credit, but it will effect your Dependant Daycare tax credit (you probably lost it). But the benefits you see from using the 125 plan, usually far outweigh the Dependant Daycare tax credit. Because you did the 125 plan, your tax refund will be smaller, however, you probably saved more than that throughout the year.

With the Daycare tax credit, you probably would have saved $600-$1050 (depending on your income level, higher your income, the lower the credit). With the 125 plan, you probably saved $950-$1950 over the course of the year, higher the tax bracket, higher the savings. Even though your tax refund may be smaller, you are getting larger paychecks.

To know for sure if this is a good plan for you, I would have to know a bit more information about your taxable income, but for a vast majority of taxpayers, the Cafeteria plan that you are doing is a good deal.

Answer 2

Check this link for info about taxes http://www.irs.gov/faqs/faq-kw90.html This IRS reference also contains links within it that should lead to answers to most of your questions
I believe that FSA are great, because they allow you to pay some of your expenses with "before tax" dollars. This has the effect of giving you a discount on everything you pay for out of your FSA. If you are in the 15% tax bracket, it's like getting a 15% discount, because that money isn't taxed as income

Answer 3

I signed up to use FSA about two years ago for 'health' expenses. It's great! The savings is remarkable (and complicated to explain). I don't think you can use the Dependent Care FSA for your son's medical expenses; you'd have to sign up for the health care as well. Check with your company's policy.

Answer 4

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