Tax Question: Flex spending account AND dependent care credit

[Wailer]

This question is for the tax preparers or the seriously tax-nerdy DIYers like myself.

I'm just finished my taxes for 2008. I had over $6k in expenses for 2 children in 2008, so I netted a $1200 federal tax credit. Woohoo, I guess.

In 2009, I estimate I'll have > $10k in eligible child care expenses. My wife's employer offers a flex spending account that'll (conveniently) cover up to $4k pretax of child care expenses. This is the open enrollment period for the flex spending and I'm trying to decide how much to put into it.

Please tell me if I understand this correctly: Of the more than $10k that'll be paid in 2009, I can have her pay the first $4k from the pretax account and then pay the remaining $6k out-of-pocket and still be able to claim the credit on my 1040 return?

relevant info: MFJ, wife has W2 income, I have schedule C income > $6k/yr

[C(-)ris]

WTF? 2009 is 3/4 over. Aren't you a bit late on your taxes? Any open enrollment now is going to be for 2010.

[Wailer]

Oh yeah. This would be for 2010.

For 2009, we didn't contribute to flex spend because it was still 1 kid at daycare (2 eligible).

[Harbourmaster]

Healthcare Flex Spending accounts do not cover child care, only health care.


Like this?

"Flexible Spending Accounts

Health care flexible spending accounts are employer-established benefit plans that reimburse employees for specified medical expenses as they are incurred. These accounts are allowed under section 125 of the Internal Revenue Code and are also referred to as "cafeteria plans" or "125 plans." The employee contributes funds to the account through a salary reduction agreement and is able to withdraw the funds set aside to pay for medical bills. The salary reduction agreement means that any funds set aside in a flexible spending account escape both income tax and Social Security tax. Employers may contribute to these accounts as well.

There is no statutory limit on the amount of money that can be contributed to health care flexible spending accounts. However, some companies place a limit of $2,000 to $3,000 on flexible spending accounts. Once the amount of contribution has been designated during the open enrollment period that occurs once each year, the employee is not allowed to change the amount or drop out of the plan during the year unless he or she experiences a change of family status. By law, the employee forfeits any unspent funds in the account at the end of the year. There have been proposals introduced in Congress to ease this "use it or lose it" rule by allowing up to $500 to be carried over to the next year; such proposals have not been enacted."

[datbeme]

Harbourmaster wrote:
Healthcare Flex Spending accounts do not cover child care, only health care.

Right, but Dependent Care Flexible Spending accounts cover child care, and that's what he's asking.

Wailer, the paperwork can be a bit of a pain, but if you know you're going to spend that much, you might as well do the full amount. I believe the advantage is that you are avoiding SS and Medicare taxes on this portion. I did this for a few years, but I'm kind of glad to be done with it. What I really don't miss is all the Household Employee mumbo jumbo associated with having a nanny.

[Speedy]

You can claim the remaining $6k on your return.

[macphanatic]

Child care flex spending accounts are limited to $5,000 a year per family. You pay for child care and submit receipts for reimbursement. Any child care expense about the flex spending account may be deductible, it all depends on your income level.

[Wailer]

Yes, it is a dependent care flexible spending account specifically for paying child care service. She also has a healthcare flex account that is separate. Both are "use it or lose it".

I really appreciate the advice! The account is actually capped at $4992 for some odd reason and not $5k (or $4k as I previously misstated). I know I'll have at least $11k in 2010 of childcare with 2 kids, so I'm hoping to use her $5k first and then pay the $6k out-of-pocket and claim the credit on that amount.

For those of you that aren't familiar with the childcare tax credit, you get a credit of 20% or more of your qualified childcare expenses (up to $3k for 1 child, $6k for 2 or more children) if both you and your spouse work (both must have W2 or schedule C income in excess of $6k each). This is not phased out based on income! It'll amount to $1200 credit for a family with 2 or more kids and both parents working. This is separate from the $1k/yr child tax credit that is phased out based on income.

Thanks again all.