Do you think that a flexible spending account for daycare is a good way to go?

Question

My job offers it and I have yet to do it because I like getting back a big refund, but do you think that I would be better off getting the money pre-tax?

My tax bracket is low. The maximum for the FSA is $5000 and I pay more than that in a year.

Answer 1

If your income is so low that you are in a zero tax bracket, then the FSA does you absolutely no good, and also the daycare credit does you absolutely no good.

At the other extreme, if you are in the 25% tax bracket, you are going to get only 20% credit on the first $3,000 of daycare expenses you pay, or $600. If you take the FSA for $5,000 you will reduce your taxes by $1,250, so the FSA wins.

In between, you will have to run the numbers. If you owe taxes but are in less than a 20% bracket, it is probably better for you to pay after-tax. Your dependent care credit will eliminate the taxes you owe, and you will then get the full benefit of the Child Tax Credit and Additional Child Tax Credit of $1,000.

Answer 2

Yes I use FSA all the time, just make sure that you know the correct amount you spend on daycare (better to be less than the amount), so at the end of the year you don’t get in trouble. Make sure that you turn in your receipts so you can get reimbursed. It is hard at first to get use to the money being taken out of your check if you are on a fixed income but after a month or two you will be okay. It is great!

Answer 3

Generally you'd be better off with FSA, since you don't hit the limits there that you might hit taking the child care credit instead. But if your expenses and/or your tax bracket are low, you might be better off with the tax credit rather than the FSA.

Answer 4

depending on your tax bracket - you could save more with the FSA - maximum tax credit is only 20% I believe, but if you're in the 25% bracket - you're better off going FSA

Answer 5

Yes...... if you handle it correctly you can save tax dollars.