I am married filing jointly and together we earl less than $90,000. We have two children, one of which is in daycare. Is it more beneficial to take advantage of an FSA for dependant care or claim the child care credit at the end of the year, or can we do both?

ANSWER

The BIDaWIZ Team's Answer:

It's likely to be more beneficial to contribute to a flexible spending account than to claim the child care tax credit, but it depends on the amount of expenses. Also, as a general rule of thumb, the greater your income, the more tax advantageous it is to utilize a flexible spending account. Please note that the FSA allows parents to use pre-tax dollars (before income taxes and Social Security/Medicare expenses are deducted) to pay for child-care expenses. For instance, taxpayers in the 28% tax bracket would avoid paying 28% plus Social Security/Medicare 7.65% or 35.65% in taxes. If you set aside the maximum $5,000 of your FSA for child-care expenses, you would be saving $1,783 in taxes. You would be saving less, or $1,000 (20% of $5,000), if you claimed the child care tax credit and earned income above $43,000. So, it depends on the situation, but, the FSA could be a better option. Please note that you cannot utilize a flexible spending account and claim the child care tax credit for the same expenses.