Flexible Account or Child Tax Credit?

Question

I make approx. 20,000/yr. Would it be better for me to enroll in my co. Flex dependant care account ( I would not be taxed on about $2,080) or take the child tax credit ( I have one child) on my returns?

It is the Dependant Care Tax Credit, sorry about that. I was basically wondering if I would receive more from Credit at the end of the year based on my income and one child, or if I would save more during the year with the DCAP (tax-free $2080)

Answer 1

Excellent question, by the way. Not easy to answer without knowing more information.

DCC: for someone who has an adjusted gross income (AGI) of $20,000, DCD is 32% of the child care expenses up to $3,000. 32% of $2,080 is $666. Now, for you to get the whole $666, you must have at least $666 of tax liability. It is likely you won't have that much liability. $20,000 - 7,850 - 3,400 - 3,400 = 5,350 of taxable income (assuming you file as head of household and claim one dependent with standard exemption). This causes a tax liability of $535 which lowers your $666 savings to $535. If you are claiming anyone else, or if you itemize your deductions, this $535 can be even lower.

Flex: for this option, your income is lowered by $2,080. All the ramifications of this are difficult to know, but you will definitely save $159 is FICA taxes. You will also probably save $208 in federal taxes and some unknown amount in state taxes. $208 plus $159 is $367 which is less than the $535. However, lowering your AGI by $2,080 can give you $355 more Earned Income Tax Credit (using 2006 numbers) (assuming you qualify for and use the EITC) which, when added to the $367 give you a new savings of $702 which makes it more lucrative than the DCC.

So, bottom line is, without knowing a lot more info, we can only guess. But, assuming normal taxable items, you will probably save a bit with the Flex plan. Your state can be the big wild card. For example, in California, they also have a DCC which is refundable, meaning if the credit is more than your tax liability, you still get the whole credit. For many "low income" people in California, DCC is more beneficial than Flex. $20,000 is not quite "low income" when it comes to the CA cut-off, but it is close.

Answer 2

Although your refund is close to the same whether you take the Dependent Care Credit or the FSA, I disagree with both the previous answerers. I believe you should not take the FSA. You should pay out of pocket for child care and take the Dependent Care Credit.

The Dependent Care Credit is the first credit that reduces your taxes. It applies before the Child Tax Credit. If you owe any tax, the DCC will reduce that tax to zero. Then you will not receive any Child Tax Credit, but you will receive the full $1,000 Additional Child Tax Credit, plus the Earned Income Credit.

Example (rounded the numbers: Filing Status Head of Household

With DCC

Income: $20,000
Taxable income: $5,450
Tax: $545
Dependent Care Credit: -$545
Additional Child Tax Credit: $1,000
Earned Income Credit: $1,914
Refund: $2,914

With FSA
Income: $18,000
Taxable Income: $3,450
Tax: $345
Child Tax Credit: -$345
Additional Child Tax Credit $655
Earned Income Credit: $2,233
Refund: $2,888

The advantage to taking the Dependent Care Credit over the Flexible Spending Account is even greater when your filing status is Single. I omit the computation:

Refund filing Single with Dependent Care Credit: $2,914
Refund filing Single with FSA: $2,758

Answer 3

Are you talking about child care credit or child tax credit? They are 2 different things. The child tax credit you get as long as your child is under age 16. Child care credit seems to be more related to what you are asking. I would say your best bet is to enroll in the flex dependent care account. But remember, you only get a child care credit as long as your child has not reached the age of 13.

Answer 4

Not quite true - if you use FSA for child care, you can't also take a child care credit for the same money, and any child care credit would be affected by the amount used under the FSA. Your regular child credit is not affected. As far as which is better, do the math - it can go either way depending on your individual situation

Answer 5

You get the child tax credit in any case if you have any tax liablility, so I assume you are talking about the dependent care tax credit. By the time you take the child tax credit, it's very likely that you won't have any tax liability anyway - if so, then you'd get no benefit from the dependent (child) care tax credit or the flex plan - since you wouldn't owe any taxes, there's nothing to decrease.

Be sure to take the earned income credit also on your return.