Deducting Child Care Expenses

January 5, 2008 6:24 PM

TAX-Filter: Please help me understand the difference between: (a) Deducting child care expenses from my taxes, (b) claiming the Child and Dependent Care Credit on my tax return, and (c) Using a section 125 Flexible Spending Account to pay for child care expenses.

Can I combine all of these, or is it one or the other? Are (a) and (b) the same thing?

I am so confused!

posted by yet.another.boston.question to Work & Money (6 answers total)

If you go to the IRS website, there is a list of several free tax preparation services including Turbo Tax. I have used Turbo Tax and it is almost idiot proof in that it walks you through steps and will ask you questions and remind you of things you might be able to deduct. You can go through it for free, plugging in all your numbers and plug in all your variables and see which one offers you the best option. It is free to do Turbo Tax up to the end where you would submit it to the IRS electronically--that part might be free if you have under a certain amount of income, or there might be a fee attached, but you can work out all the figures and do a complete return without submitting it and do that for free. You can save your return without submitting it so all your data is still there if you find an area you need to research better.
posted by 45moore45 at 7:37 PM on January 5, 2008

Have you already used an FSA to pay for childcare expenses? What kind of childcare do you have?
posted by mattbucher at 8:24 PM on January 5, 2008

It's more like a) and c) are the same thing. The credit is a max of $600 (or was last year). Electing to place $5000 of your pre-tax income in a flex account can save you more than $600 DEPENDING on your income. Generally, the more you make, the more likely it is that the flex account is a good idea.

It's too late for the 2007 tax year - if you didn't elect the flex option a year ago, the credit is your only option. And it's quite likely it's too late for 2008 as well. At my employer, I had to choose whether I was going to do flex by Nov. 30th. I don't know about the IRS rules, though. There may still be a chance for you to choose flex for 2008 depending on your employer.
posted by peep at 10:03 PM on January 5, 2008

Response by poster: Some more info:

I have used turbotax in the past. I am preparing for 2008, and mostly wanted to figure out the differences. My employer is graciously letting us have until Monday to decide (because that is when he is running the first payroll for the year).

My wife and I have never used the FSA before; I am kind of regretting that now: It looks like we could safely place the whole $5000 in the FSA, as our child-care expenses are going to be at least 10k for the year (full time pre-schooler).

We have taken the $600 credit before, and since we are in one of the middle-class brackets we should save more than that. Does one not take the credit if you are doing the FSA?
posted by yet.another.boston.question at 6:01 AM on January 6, 2008

We have always used the FSA benefit for the maximum (previously $4800, now $5000). We topped out at +$10k in expenses a few years ago, when one child was in full-time daycare and the other was in afterschool; I think we were able to get part of the child-care tax credit even after subtracting out the FSA benefit. Now we have just one in afterschool and a few weeks of full-time summer camp, but the FSA is still worth it for us, for the pre-tax benefits.
posted by Sweetie Darling at 8:02 AM on January 6, 2008

The conventional wisdom is that if you are in a tax bracket higher than 15% (and it sounds like you are), use the flexible spending account instead of the credit. FSA salary reductions will also reduce your Social Security taxes, if your income is below the maximum taxed. And the tax credit is capped at expenses of $3,000, while you can go up to $5,000 through the flexible spending account.

Does one not take the credit if you are doing the FSA?

One may not take the credit on benefits reimbursed through the FSA. But may one claim the credit on qualifying expenses which are over and above the FSA reimbursement? That makes sense, but I don't find authoritative answers online, and IRS regulations don't always make perfect sense. The discussion on p. 9 of IRS Publication 503, "Child and Dependent Care Expenses", suggests that you may. You may be able to find the answer by experimenting with your Turbotax software

Definitely take advantage of your employer's FSA.
posted by Snerd at 8:38 AM on January 6, 2008