Should I utilize my employer's flex account, or take the child care credit?
Child care credits and flex accounts were created to help offset costs parents incur for care of their children.
It's important to note, the benefit is reserved for parents who are working, looking for a job, are full-time students, or are physically/mentally unable to care for self. This means married couples must have both spouses fit one of the criteria in order to benefit.
For example, a married couple with one spouse who stays at home with their child would not qualify, unless that spouse was a full-time student, actively looking for a job after losing a job, or physically/mentally unable to care for him/herself.
Below is a breakdown of how Child Care Credits and Child Care Reimbursement Accounts (Flex Plans) work.
1) Child Care Credit (Dependent Care Credit)
If you pay for child care to allow you to work—and earn income for the IRS to tax—you can earn a credit worth up to $4,000 if you're paying for the care of one child under age 13, or up to $8,000 if you're paying for the care of two or more children under 13. The size of your credit depends on your income and how much you pay for care.
Workers with an Adjusted Gross Income (AGI) of $125,000 or less can claim a credit of up to 50 percent of qualifying costs; the percentage gradually drops for taxpayers reporting AGI over $125,000 and phases out completely at $438,000. The credit is also refundable (meaning you don’t need an offsetting tax liability to use the credit) if you lived in the United States for at least half the year.
2) Child Care Reimbursement Account (Flex Plans)
You may have an even more tax-friendly way to pay your child care bills than the child care credit: a child care reimbursement account at work. These accounts, often called Flex Plans, let individuals and married couples filing jointly divert up to $10,500 a year of salary ($5,250 for married separate filers) into a special tax-advantaged account that can then be tapped to pay child care bills.
Money you run through the account avoids both federal and state income taxes as well as Social Security and Medicare taxes, so it could easily save you more than the value of the credit. Plus, while the limit for Flex accounts is $10,500, the credit can be claimed against up to $16,000 of eligible expenses if you have two or more children. So even if you run $10,500 through a Flex account, you could qualify to claim the 50 percent credit on up to $5,500 more in expenses.
By using the account at work, you lower your taxable income...which saves federal, state, social security, and Medicare taxes. This can easily add up to over 40% savings on the $10,500. In other words, it would likely put $4,200 in your pocket (depending on your tax bracket) with the $10,500 in expenses. Plus, you could qualify for more in dependent care credits if you have two or more kids with added expenses per child.
Generally the higher your income, the more likely you’ll want to use the Flex Plan instead of Child Care Credit.
Also, if you don’t run the account through work, you can only do the child care credit...you can’t also take expenses as a deduction.
In either case, the care needs to be with an individual or company for whom you have a valid tax ID #, so you can report the expenses. The provider will generally give you a year-end statement summarizing your expenses for the year. This is your "receipt" and what you'd use to provide your tax preparer with the child care info. We have a helpful worksheet to provide you with an easy format for providing this info - click here.
As always, feel free to contact us with your tax questions...we’re happy to help!
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