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 between $600 and $1,050 if you're paying for the care of one child under age 13, or between $1,200 and $2,100 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 (you can count up to $3,000 in expenses for the care of one child and up to $6,000 in expenses for the care of two or more).
Workers with an Adjusted Gross Income (AGI) of $15,000 or less can claim a credit of up to 35 percent of qualifying costs; the percentage gradually drops to a floor of 20 percent for taxpayers reporting AGI over $43,000.
If you have one kid and make over $43,000...you get a credit equal to 20% of $3,000 = $600. If you have one kid and make under $15,000...you get a credit equal to 35% of $3,000 = $1,050. If you have two kids, you would double the above credit eligibility.
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 $5,000 a year of salary ($2,500 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 $5,000, the credit can be claimed against up to $6,000 of eligible expenses if you have two or more children. So even if you run $5,000 through a Flex account, you could qualify to claim the 20 percent to 35 percent credit on up to $1,000 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 $5,000. In other words, it would likely put $2,000 in your pocket (depending on your tax bracket) with the $5,000 in expenses. Plus, you could qualify for $200 to $350 more in dependent care credits if you have two or more kids with at least $3,000 in 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, you may find Flex Plans to be your better option if you have only one child, since it makes up to $5,000 in expenses allowable, while the Child Care Credit has a $3,000 limit.
Lastly, 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!