WWYD-FSA for childcare

splotch716 · May 2016

I started a new job at the beginning of the month. They offer a FSA for dependent care. We recently had to put DD into daycare 3 days a week because my MIL had a second back surgery. Initially the plan was for my MIL to take her back the 4 days a week she had before. However, she informed us last week that she would only be able to provide 2 days a week. DH works 4/10's and stays home on Mondays with DD. The daycare center said it is cheaper to pay for 3 days a week than 2.

I am having trouble deciding if we should do the FSA for dependent care or not. We will be paying just below $7,000 for the rest of the year. My understanding is the FSA is pretax, which lowers the amount of income that is taxed. However, I am trying to figure out the tax benefits at the end of the year. I think it is worth it but wondering if anyone has any experience with this?

Thanks!

short+sassy · May 2016

Although I don't have experience with FSA for dependent care, I used to do that a lot with FSA for medical care. It basically works the same way.

I would highly recommend you have at least something taken out for the daycare expenses you know 100% will you be paying this year. I mean, hey, it's money you don't have to pay taxes on! Win-win. The only negative is it is a "use it or lose it" system...at least I am assuming it still is. So, if you over-estimate and have too much taken out as compared to your daycare expense, you'll lose however much money that is.

I don't know about the legalities, but I'm wondering if you could pay your MIL some money for her daycare assistance and use the same bucket for that. Though I wouldn't be surprised if it has to be a licensed daycare or something like that.

smerka · May 2016

I would put money you know you are going to spend on daycare in an FSA. Just know you can't double dip and then claim the dependent care credit. If you claim money you pay your MIL or pay her through the FSA, she will have to claim it as income on her tax return.

cbee817 · May 2016

We do this every year. My employer takes out $192.31 from my paycheck (pre-tax) and I get reimbursed $192.31 the following week. We submit the monthly bill from the day care facility and have to include the tax ID each time to our HSA/FSA administrator. We pay over $10,000/year just for 1 child so it's a great benefit.

DD#2's last year will be the 2016-2017 school year. For January - June 2017, day care costs will be over $6,800 so we'll be maxing the benefit again next year.

For 2018, DH's mom is getting both girls off the school bus and I get them on the bus, so hopefully we'll be done with day care/after school costs (fingers crossed).

Xstatic3333 · May 2016

Something I'm curious about, as someone hoping to have need to use our FSA before too long, is whether there is any concrete benefit to using the dependent care FSA versus taking the tax deduction at the end of the year. It seems to me that the bottom line would work out the same either way, and taking the deduction would be less headaches and paperwork. Is there something obvious I'm missing here?

cbee817 · May 2016

Xstatic3333 said:

Something I'm curious about, as someone hoping to have need to use our FSA before too long, is whether there is any concrete benefit to using the dependent care FSA versus taking the tax deduction at the end of the year. It seems to me that the bottom line would work out the same either way, and taking the deduction would be less headaches and paperwork. Is there something obvious I'm missing here?

http://www.practicalmoneyskills.com/personalfinance/lifeevents/benefits/dependentFSAs.php

Keep in mind that the IRS allows an income tax credit of up to $3,000 for dependent care expenses if you have one dependent, or up to $6,000 if you have two or more dependents. The amount of the credit is based on your adjusted gross income and applies only to your federal income taxes. So, while the maximum allowed under a Dependent Care FSA is $5,000, you may be able to apply the Child and Dependent Care Tax Credit for amounts over that limit – up to your tax credit limit – depending on your tax situation. For more information on how the tax credit works, see IRS Form 2441, available at www.irs.gov, or consult a tax professional.

Also, we have zero paperwork- it's all online so it has been a really easy process.

splotch716 · May 2016

We were looking at the FSA because we only have one child. According to the IRS and the info above, only $3000 can be claimed as a tax credit for one dependent. If I understand it correctly, it also says only a certain percentage, dependent on income. We never claimed the money we paid my MIL last year ($500/month) and the 2 days a week she is offering now are free.

My biggest worry is not using all of it. But we have decided to do the full $5000 at this time. It just makes sense. I think one of my hesitations is looking at what my take home pay is after this deduction and medical deductions. I just have to keep reminding myself that we were going to spend this money on daycare anyways, so there is a benefit. It hurts to see the number though.

smerka · May 2016

Two things about the credit. If your income is over $43,000 ish, you get 20% of the 3,000 or $600. If your tax bracket is higher than 20%, it is better to use the FSA money. Second, if you have two qualified kids but only pay expenses for one, you can still claim $6,000 in expenses. I know it seems wrong, but read through the form (2441) and you will see what I mean.

Xstatic3333 · May 2016

cbee817 said:

Xstatic3333 said:

Something I'm curious about, as someone hoping to have need to use our FSA before too long, is whether there is any concrete benefit to using the dependent care FSA versus taking the tax deduction at the end of the year. It seems to me that the bottom line would work out the same either way, and taking the deduction would be less headaches and paperwork. Is there something obvious I'm missing here?

http://www.practicalmoneyskills.com/personalfinance/lifeevents/benefits/dependentFSAs.php

Keep in mind that the IRS allows an income tax credit of up to $3,000 for dependent care expenses if you have one dependent, or up to $6,000 if you have two or more dependents. The amount of the credit is based on your adjusted gross income and applies only to your federal income taxes. So, while the maximum allowed under a Dependent Care FSA is $5,000, you may be able to apply the Child and Dependent Care Tax Credit for amounts over that limit – up to your tax credit limit – depending on your tax situation. For more information on how the tax credit works, see IRS Form 2441, available at www.irs.gov, or consult a tax professional.

Also, we have zero paperwork- it's all online so it has been a really easy process.

Awesome! Thanks for the link. Sounds like we could get much more paid for pre-tax using the FSA. Our childcare expenses will definitely be much more than $5,000, so maxing it out will be the way to go for us.

short+sassy · May 2016

smerka said:

I would put money you know you are going to spend on daycare in an FSA. Just know you can't double dip and then claim the dependent care credit. If you claim money you pay your MIL or pay her through the FSA, she will have to claim it as income on her tax return.

Oops, thanks! I didn't realize there is already a dependent care credit deduction that a parent can choose instead.

blondie42107 · May 2016

I used a FSA for dependent care for 5 years. I maxed out the $5000.00 each time. We had our CPA run the numbers and it was better for us to do the FSA. It's weird seeing the $192 (ish) come out of your paycheck but if you submit receipts regularly - I did mine for each pay period - the same amount coming out was going right back in. My new employer doesn't offer it and I'm really bummed out! On the bright side, our annual daycare expenses have already peaked and are now declining with having one in preschool. Next year we'll have one in kindergarten and one in preschool. So less in daycare, more in tuition, but still overall less than having two kids in full time daycare.

crunchymommy15 · May 2016

from what I've heard, in almost all cases you're better off doing the FSA if you know 100% that you'll use the money you put in. Where I work you can change your dependent care allocation anytime throughout the year, so if you got to september or october and had an excess of funds you could decrease your contributions for the remainder of the year.

splotch716 · May 2016

Another question came up around this today when trying to do my June budget. How do you account for the money in your budget? I use every dollar for my budget. I was thinking of having it be another income line. That way it doesn't look like we are going into the negative.

short+sassy · May 2016

I have an HSA amount that automatically comes out of my paycheck. What works for me is I just pretend that is not income I have. As an example, if my paycheck is $1,000 and my HSA is $200 per paycheck, I just pretend my net paycheck is $800 for budgeting purposes. I also don't include my regular medical expenses as expenses, because I know I can just use my HSA card for those.

This may not work as well for you, since you don't have a handy debit card that will have just your daycare deductions on it, but I wanted to at least throw the idea out there.

WWYD-FSA for childcare

Re: WWYD-FSA for childcare

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