Monday, February 28, 2011

Dependent FSA vs. Dependent-Care Credit:

In a Dependent FSA you can contribute pre-tax money of upto $5,00 per year to pay for qualified expenses for your dependent. The money not only is pre-tax but it also saves payroll taxes ( 7.65% of social security & medicare). So depending upon your tax bracket, assuming you are in the 25% tax b...racket, the tax savings can be $5000* (7.65% + 25%) = $1,632.50. 
Dependent - Care Credit helps to lower your ax liability. It is calculated on Form 2441.The child and dependent care tax credit is worth 20% to 35% (depending upon your income) of your day care expenses. Some pre-requisites for taking Dependent-Care Credit:
1) BOTH spouses must be working or one must be a full time student.
2) The dependent must be under age 13 or unable to take care of himself/herself.
Tax Tip: If you have dependent care expenses in excess of $5,000 and 2 or more children you can benefit from both. You can use Dependent FSA to pay for first $5,000 of the expenses and for the additional you can get dependent care-credit (if your income is below the threshold).

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