Your Life

Your Life

Major life milestones often have a major tax impact. Changes in your marital status, having a baby or adopting a child can have significant impact on your taxes. This is the place to ask questions about dependents, real estate, and other various scenarios that play a significant role in what taxes you pay.

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Registered: ‎07-14-2017
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Single Head of Household, 4 children. FSA or credit best option?

Im a single Head of Household with 5 children. 2 in children in care while I work. I earn 49,100 a year. Would it be a better route for me to use the FSA with my company for dependent care expenses? Or to simply wait for the tax credit? Which will help me receive a better refund of my expenses?
Tax Pro
Posts: 5,362
Registered: ‎02-23-2016

Re: Single Head of Household, 4 children. FSA or credit best option?

Hi Giannac0512,

 

Welcome to the H&R Block community.

 

The child tax credit at your income level is $1,000 per child for all of your children who are under age 17.  In addition, you can claim the dependent care credit for your children who are under age 13 and in daycare.  You can also do an FSA, but your dependent care credit is reduced by any benefits that you receive from your plan through work (no double dipping).

 

A tax-favored savings plan might save you a few dollars in tax.  For instance if contributed $4,000 to an FSA so that you don't have to pay tax on it if you use it for childcare costs then you might save $500, but the credits are worth thousands.

 

So here's what we're looking at with just what I've gone over so far taken into account:

 

Your maximum dependent care credit with 2 kids (based on your income)  =  $1,200

Your child tax credit for 2 kids (you'll get more if any of the others are under age 17)  =  $2,000

Your tax savings (based on your income & tax bracket) from using tax-favored savings of $4,000 on daycare expenses (from your FSA)  =  $500 (ballpark).

 

There is one other thing that affects your credits, and that is that the dependent care credit is non-refundable, meaning that if you don't owe tax your tax liability is less than your maximum credit you will not get the credit or you may not get the full credit.  For this reason I'm actually going to recommend going with both the FSA and the tax credit.

 

Note that the child tax credit is unaffected by the FSA plan so you'll still get the full child tax credit.

 

If you go with the FSA you will deduct any benefit you receive from it from your maximum dependent care credit.  That means that if you spent $6,000 or more on daycare expenses and you received $4,000 from your plan though work to cover some of the cost then you'll reduce the $6,000 maximum that you can enter on Form 2441 to calculate the credit by the $4,000 you received from your FSA plan.  So you'll calculate the DCC using $2,000 and your credit will be $400 instead of $1,200 but you'll also have saved that $500 or so in tax from having the tax-favored plan.

 

So if you do both the FSA and the tax credit you still get the credit, but instead of taking the chance of the credit not being given because your tax liability is too low you'll get a smaller amount of credit and a tax savings from the employer plan that combined will give you close to the benefit of the full credit.  You will get 6 exemptions plus your standard deduction since you have five kids and that will automatically reduce your taxable income to less than $10,000, and on top of that you get the child tax credit and the earned income credit which will more than likely wipe out most or all of your tax liability, so again, I would do both the FSA and the dependent care credit for the maximum benefit.

 

If you have any other questions I'll be glad to help.

 

Louis,
Senior Tax Advisor (Tampa, FL)