Dependent Care Flexible Spending Account vs. Tax Credit

Dependent Care Flexible Spending Account vs. Tax Credit
The amount of dependent care tax credit depends on your income level, dependent care costs, and the number of dependents receiving daycare. The credit is 20 to 30 percent of up to $3,000 of care expenses for one dependent and up to $6,000 of care expenses for two or more dependents. You should determine if it is to your advantage to take the tax credit for dependent care expenses or pay for them through a Dependent Care Flexible Spending Account.

The tax credit is designed to become less valuable as your income increases, while the Dependent Care Flexible Spending Account becomes more valuable as your income increases.

You may not claim a tax credit on your income tax return for dependent care expenses that were reimbursed from your Dependent Care Flexible Spending Account. In addition, the amount of dependent care expense for which you may claim a tax credit is reduced, dollar for dollar, by the amount of expenses that are reimbursed from your Dependent Care Flexible Spending Account.

For example, assume you have one dependent child. You set aside $2,000 in your Dependent Care Flexible Spending Account and incur $3,400 of eligible dependent care expenses during the year. You will receive reimbursement of $2,000 from your Dependent Care Flexible Spending Account and may claim a dependent care tax credit for $1,000 (not $1,400) on your federal tax return since $3,000 is the maximum federal tax credit allowed for one child.