A Dependent Care FSA can generate greater savings than the Child Care Tax Credit in several ways:
Bigger deductible amount - based upon the number of children for which you are paying child care expenses.
Families with one child save the most because the eligible amount is bigger
Higher percentage of savings - if you are in the 25% tax bracket or higher, the FSA has a higher percentage of tax savings
FICA Tax - Only an FSA saves you from this tax
Below is an example of how you may save $1,030 annually.
Tax %
Deduction Amount
Income Tax Savings
FICA Tax Savings 7.65%
Net Savings
Dependent Care Flexible Spending Account
25%
$5,000
$1,250
$380
$1,630
Child Care Tax Credit
20%
$3,000
$600
$0
$600
Difference
5%
$2,000
$650
$380
$1,030
Dependent Care FSAUsing the IRS Child Care Tax Credit? Get bigger Tax Savings and Deductions for using a Dependent Care Flexible Spending Account FSA for your childcare, daycare expenses.
1- Child Care Expenses Eligible for Tax DeductionsMany parents miss out on considerable tax savings by failing to claim all their eligible child care expenses. Day care and preschool costs obviously qualify. Don't forget about these extra expenses, and important rules.
2 - Number of Children in ChildcareThe number of children in child care determines the amount you can claim in expenses on your taxes. The limit for the child care tax credit differs from the dependent care flexible spending account (FSA). Make sure you apply the rules correctly to maximize your deductions.
3 - Flexible Spending Account Cuts Taxes in 6 WaysA Flexible Spending Account can save you Federal Income, Payroll, and State Income taxes. There may also be hidden tax savings on Alternative Minimum Tax, Child Tax Credit, and Education Tax Credits
4 - Your Federal Income Tax Bracket & AGIYour Federal Income Tax Bracket and Adjusted Gross Income (AGI) are important figures to know when determining how to maximize your child care tax deductions. See how these come into play.
