Save Big With Dependent-Care Benefits

If you're like me, you know a little about a lot of things. That and a dollar will get you a Slurpee at 7-Eleven (and not the biggest size, either). So I shouldn't have been surprised to learn a thing or two about dependent-care benefits when going over the IRS' guidelines in Publication 503.

It turns out that having a child in preschool, a move that allows me to significantly increase my writing time and earn more money for the family, qualifies me for dependent-care benefits. Why am I surprised? Because what I thought I knew about dependent-care benefits was that they had to be used for babysitting or daycare. The last time I looked at the IRS guidelines was when my first child was a baby. In other words, preschool wasn't yet on my radar.

But as my children grew, preschool definitely entered the picture. Our two oldest kids are now school-age, and between the two of them, they logged in five years of preschool at a price tag of approximately $9,000. Had my husband and I used the benefits available to us -- either child-care tax credits or dependent-care flexible spending -- we could have saved upwards of $2,700. Ouch.

Here's an introduction to Dependent-Care Flexible Spending and the Child-Care Tax Credit designed to get you asking the right questions before it's too late.

Dependent-care flexible spending
A Dependent-Care Flexible Spending Account (sometimes referred to as a reimbursement account) allows you to have money set aside from your salary, pre-tax, each pay period in order to get reimbursed for eligible expenses related to the care of your dependents. Eligible expenses include those that allow you or your spouse to work, look for work, or attend school full-time. The cap is $5,000 for single heads of household or folks who are married and filing jointly. Here are some other aspects of flex spending accounts to consider:

  • You must open a Dependent Care Flexible Spending Account during the annual enrollment period. To make any changes to the amount you're having deducted, or to enroll outside of that window, you'll have to meet the criteria for a "qualifying event." Check with your HR representative to find out if you qualify.
  • Unlike a health-care flexible spending plan, you cannot get reimbursed for an expense that is greater than the amount you currently have set aside in your account.
  • Flex spending plans work under the "use it or lose it" principle, which means that if you haven't spent the total amount by the deadline and requested reimbursement, you can say goodbye to the money. Therefore, your calculations to determine how much to set aside need to be as accurate as possible.

Child-care tax credit
The Child-Care Tax Credit allows you to apply up to $3,000 of expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals, to your taxes through the Dependent-Care Tax Credit. In order to claim the credit, you must fill out Form 2441: Child and Dependent-Care Expenses (opens a PDF) when you file your federal return.

  • To take the Child Care Tax Credit, you don't have to fill out any enrollment forms or have money taken out of your paycheck. You do have to file your federal tax return by the IRS deadline, however.
  • The "use it or lose it" rule doesn't apply, since none of your money has been taken from your paycheck outright.
  • Since the amount of the credit is based on your adjusted gross income, folks in higher tax brackets may be able to save more under the flex spending program.

Which one should I choose?
The answer to this question depends entirely on your family's adjusted gross income, your tax bracket, and how many dependents you have. Take a look at this worksheet designed to help figure out which benefit will save you the most money, then check with your tax advisor to see what works best for your particular situation.

Next steps

  • Contact your HR representative for details regarding your eligibility for flex spending plan options.
  • Talk to your tax advisor about which option - Child-Care Tax Credit or Dependent-Care Flex Spending -- can save you the most.
  • Read these IRS publications to determine the myriad dependent-care expenses that are eligible for reimbursement. Like me, you may be surprised.

For more on your life and taxes, read about:


Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 12, 2013, at 11:19 AM, jawill123789 wrote:

    Thank you for the information. I have a 4 year old that has been going to preschool and after going to day care (http://www.westparkdaycare.com/en/), because both my wife and I work. I wasn't sure how to go about the child care on my taxes and didn't know him being in preschool added to that. Thank you for the information, it has been very useful.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 615508, ~/Articles/ArticleHandler.aspx, 10/31/2014 4:44:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement