re: Dependent care FSA

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2) Child care credit kind of took care of it from a tax benefit standpoint.

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THIS

I've been weighing the pros and cons and while it used to be a no brainer, it is a brainer now.

FSA = pulls money out of my check while I'm still paying the daycare bill, basically tying up the money twice until I'm reimbursed. Net result is daycare is reimbursed tax free up to 5k.

OR

Pay the money once throughout the year, then claim child care expenses as a tax deduction and achieve the same thing.

Am I missing something?

FYI, not a tax professional but have been using a DC-FSA for the last 5 years.

You may be able to get reimbursed almost immediately. My paycheck arrives on a Friday and the following Monday I get the reimbursement from payflex. This is because I submit say the January information right away and January alone covers a few months of FSA contributions. By the time the January expense has tapped out, I already have February submitted. Based on this thread though that may vary based on the company/tool used.

It helps to understand the mechanics of the 2 different methods. The FSA is a tax deduction meaning that the $5,000 you contribute to your FSA comes off your taxable income and your savings would be (marginal tax rate * $5,000, i.e. 24% * 5,000 = $1,200). The other method is the child care tax credit which means you get a tax credit on a certain % (income based) on the amount spent on child care. For example if you make decent income you will only get 20% or less of the total as a tax credit. So if you spend $3,000 then you get 20% of $3,000 as a tax credit (not deduction).

It also helps to understand what are qualifying expenses. Some quick examples are daycare, pre-k tuition (not k and higher), summer camps, before and after care for school (even if the child is in K or higher) and they have to be under 13 with a few other factors such as working requirements.

The first factor to consider is the number of qualifying individuals. If you have 1 kid who receives any child care then the child care tax credit is only up to $3,000 whereas the FSA can go to $5,000.

The other factor is your marginal tax bracket and the tax credit % (changes based on income). If you are in the 22% or higher marginal tax bracket then the math would likely say to use the FSA over the credit.

If you have 2 qualifying individuals the tax credit goes up to $6,000 but your FSA is still capped at $5,000. You can use the $5,000 in your FSA and then take the tax credit on the $1,000 of unused tax credit ($6k-$5k). You can't double dip on the first $5,000 but you can still get that extra $1,000 tax credit at the appropriate %.


Example:
1 kid, $6k+ in expenses, AGI between $183k and $400k, marginal bracket 24% (MFJ)

FSA savings: $5k * .24 = $1,200
credit savings: $3k * .2 = $600

same example but 2 qualifying kids

FSA savings: $5k *.24 + $1k*.2 = $1,400
credit savings: $6k *.2 = $1,200

Anything above $400k AGI will definitely be better to use the FSA and anything below $183k would need a closer look at credit % vs marginal tax bracket as well as the limits with 1 qualifying individual.

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cut you a check in January/February.

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We only get reimbursement at the rate it is taken out of pay, not all at once like FSA.

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I could $5,000 worth of day care tax free,

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You could do the FSA for $5,000 and then $1,000 for the CDCTX when you file your taxes.

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trying up the money twice in float.

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This in general should not be the case but depending on the structure of your eligible expenses and the company administrating your FSA maybe it is necessary. As I mentioned in my previous post, my $192.31 ($5000 / 26 paychecks) is withheld from my paycheck on Friday and on Monday there is a direct deposit from my FSA administrator for the $192.31. So my float is literally a weekend.

There is also more nuance as I receive my tax benefit immediately. The taxes withheld from my paycheck are lower than if I did not do the FSA. So I float $192.31 for a weekend (every 2 weeks) and get immediate tax benefit. If you do the CDCTX you don't get the tax benefit until next year when you file your taxes.

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You could do the FSA for $5,000 and then $1,000 for the CDCTX when you file your taxes.

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That looks to be what the math is pointing to.

I'll get with my HR dept and discuss the actual mechanism of the FSA.

This is my first year doing a DCFSA and this crap has my head spinning. So even if I submit $1,000 in daycare bills the month of January I’ll only get reimbursed however much my monthly input into the DCFSA is?

You are reimbursing yourself from your DC FSA, so you can’t reimburse yourself more money from there than what you’ve contributed.

Total allowed amount is $5k, so if you are paid every 2 weeks, you’d be contributing $192/pay period. Basically, I’d skip reimbursement entirely in January, then starting in February set up an automatic reimbursement (Wex is my plan admin and they have a simple form to set this up) to myself for $300/month. I’m contributing $382/month and giving myself back $300/month. In December, give yourself a little Christmas bonus and zero out the rest of your FSA.

My company DCFSA allows reimbursement prior to funds being contributed. So, if I had a valid claim, I could be reimbursed on January 1 for the entire 5,000 and pay on it the rest of the year.

Had a long conversation with our HR benefits administrator.

I just want to say thank you for creating this thread. I've been contributing to a DCFSA this year but forgot about it. I just went online into the portal and set up the reimbursements.

Also after reading this thread I believe I accidentally double dipped on my taxes last year between DCFSA and child care tax credit...