If you have access to a flexible spending account at your employer, you could potentially use it to pay for dependent care expenses. However, you will also want to consider using a dependent care tax credit instead. Here are a few things to consider about both of these options and which one will be better for reducing your taxes.
Flexible Spending Account
A flexible spending account is a type of tax advantaged account that is set up through your employer. Employers offer this type of account as part of a benefits package. With this type of account, you will be able to contribute pretax dollars from your paycheck into it. The money in the a flexible spending account can be used for various expenses such as paying for doctor visit co-pays or insurance deductibles. With this type of account, you can also use the money to pay for dependent care expenses. This means that if you have a child at home and you have to pay for day care for them, you can use the money from your flexible spending account to do so. By doing this, you are essentially going to be paying for their childcare with money that you would have had to pay to the government in taxes.
Dependent Care Credit
Although using money from your flexible spending account to pay for dependent care expenses can be beneficial, you will then lose the ability to take a dependent care credit on your taxes at the end of the year. This is a tax credit that you can claim if you have had to pay for childcare expenses out of your own salary. If you want to qualify for this credit, you have to be paying for childcare expenses for one of your children that is younger than 13 years old. You have to be paying for these expenses while you are working at a job or looking for another job.
Which is Better?
Each individual situation is going to be different, but in the majority of cases, you are going to be better off using the flexible spending account option. This is only going to be an option for those that have flexible spending accounts through their employers. By using this option, you will be able to contribute money directly to the account without paying Social Security taxes or Medicare taxes. When you utilize the dependent care credit, you are going to have to have a very low income in order to come out ahead with this option. The higher that your income gets, the smaller your dependent care credit is going to become.
In certain situations, you can actually take advantage of both of these options. If you have two children that you are paying for childcare for, you can use up to $5000 from your flexible spending account and get another $1000 credit from the dependent care credit.