DC FSA and Child Care Credit

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jamorse61
jamorse61 Member Newcomer
edited January 15 in Credits/Deductions

What are the best ways to handle childcare credit and a DC FSA?

For background, I have two children. My wife and I both work. For 2023, one is in daycare and the other is not. My wife and I contribute $5,000 to a DC FSA. Should we be contributing this amount to the FSA vs. going for the childcare credit?

Next year, both children will be in daycare. Is the answer to the above also applicable when both are in childcare?

Answers

  • MatthewD
    MatthewD FreeTaxUSA Team
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    Hi,

    An FSA or Flexible Spending Account, can be used for medical or child care expenses. Contributions to an FSA are pre-tax contributions and are NOT included in taxable income, giving you a tax break..

    Depending on the tax bracket you are in, makes a big difference on whether or not you wanted to contribute to the FSA or pay the childcare expenses and then take the credit.

    Contributing to an FSA will reduce your taxes by the (FSA contribution X your marginal tax rate). For example, if your marginal tax rate on your taxable income is 24%, then your $5,000 contribution would yield a tax savings of $5,000 X .24 = $1,200.

    However, if you paid the childcare expenses, and your AGI is over $41,000, then your qualifying ratio is .20 and you are limited to a credit of $3,000 x .20 = $600 for each child. See the Form 2441.

    You will need to take a close look at each option to see what works best for you. Hope that helps.