How to figure out if flexible spending makes sense for childcare?

[JustMe]

I have never done flexible spending for the money I spend on childcare, but just did my taxes and was shocked (negatively) to see how little of a credit I actually got based on how much I spent without flexible spending. Does anyone know how to figure out which way is the best?

TIA,


Robyn

[lilycat88]

I've never spent any time trying to figure out whether it makes sense, quite frankly. Our financial advisor just told us we absolutely should do it. I figure anything I can pay for with pre-tax money is a good deal. So, we take the max every year. Our tax preparer puts the remaining $5,000 or so NOT paid for by our flex plan on our taxes.

[kijip]

Flex plan generally beats the Childcare Tax Credit. Since the maximums on most flex spending accounts is lower than the full cost of care most places, you can use flex for part and the cctc for the rest.

[klwa]

I know 2 years ago there was a breakdown in our Flex handbook that gave where the cutoffs were for using CCTC compared with Flex. I don't have the book here with me, but it seems like 95% of people were better off using Flex. I guess the best way to check would be to see what % you are currently paying in taxes based on this years return. Then see if that % of the $5000 (or whatever the max is) is greater than the amount of the CCTC. For us, there was no comparison. It made SO much sense to use the Flex account instead.
-Kris

[VClute]

The other thing to consider here is that, unlike in a medical spending account, you have to have the funds IN your childcare flex account in order to be reimbursed out of it. That means that, at the beginning of your plan year, your paycheck will be "short" and you'll STILL have to pay your childcare on time and wait for the reimbursement. For some people, this isn't doable. Or, it is, but it's awfully painful.

I used to be a benefits advisor and this is the one reason the people who NEEDED pretax savings the most didn't do it.

Amy in NC
mom to Dixon, born 2/14/05
...and let the shopping begin!

A GIRL (!!) Due 3/30/07

[roysmom]

Okay, we did the flex account thing last year and it worked great for us. Never had to wait on any money, it was automatically deposited into my account and all I did was submit a form at the beginning of the year. The drawback was instead of getting $3000 in back in taxes, we only got $1200. I realize that we probably saved that in the flex account, but we would rather have the lump sum at the beginning of the year...usually pays for our vacation. Yes, I know, if you put the difference into savings, it is all the same. That just doesn't work in my house.

This year is much different. My company changed who administered the flex account and I have had nothing but problems since. I swear, I have had to call them at least once a week since the first paycheck in January. I finally pulled DS out of daycare for a week so that I could drop flexible account. It was the only way. We were out $400 by the end of January and it was another two weeks before I got reimbursed a dime. I assure you, the headaches and stress I have had to endure over this, by far outweighs the couple of hundred dollars we might have saved. I will not be doing this again. I am pretty smart when it comes to taxes, but it still is not worth it.

The only true way to determine how much you save, is if you do not get a raise from year to year. Otherwise, you would probably need to talk to an accountant to get some help.

[daniele_ut]

My benefits website has a calculator on it that helps you determine which way will save you more.

As an example, a couple who is married filing jointly, with a combined income of $75,000 that claims the max for childcare ($5000) yields this result:


Your estimated* income tax savings for claiming dependent care expenses on your individual income tax return: $480

Your estimated** income tax savings through the FSA program: $2133

It's a no brainer for us, and it's worth the few hassles that we have to go through to make the claims. As the pp mentioned, we were short for the first couple of paychecks as we let the account build up and still had to pay childcare out of pocket, but now I just pay childcare every 2 weeks and make a claim that day so the reimbursement is made in time for me to write the next check.

[tarahsolazy]

I don't qualify for the dependant care tax credit since my son doesn't "need" to go to childcare, but I still qualify to pay it through a dependent care savings pre-tax account at work. So for us, it makes a lot of sense to do it.

[masha12]

duplicate post

[masha12]

Another thing to consider is the fact that FSA money is taken out before Social Security is withheld so you don't pay Social Security taxes on the FSA funds.

As long as the person with the FSA makes less than the max income that is subject to S.S. (I think it is about $95k), you enjoy additional tax savings from the FSA.

[kijip]

That is an excellent point- flex plans are good even if there is a stay at home parent in the home. The tax credit is only for those who needed the care in order for all of the parents in the home to attend school or work.

[JustMe]

Thanks so much. This is all great info.

Daniele or anyone else, can you list the link of a website that has a calculator.

TIA,



Robyn

[o_mom]

I thought flex plans had the same rule?

Ours says: "The services rendered must be necessary to allow you and your spouse to work, look for work, or attend school full-time"

[sdbc]

In our state (NC) flex plans have the same rule. One of my coworkers had to pay the flex money BACK at the end of the year because her husband was considered not employed (even though he technically was a post-doc and worked full-time--another story).
Sue, mommy to Aurora (Rory) born 5/13/04