Dependent-care FSA vs tax credit


D

David S Meyers CFP

[copied from
<http://meyersmoney.wordpress.com/2012/03/26/morningstar-article-on-dependent-care-fsa-vs-tax-credit/>
]


Morningstar article on dependent-care FSA vs tax credit
A must-read for anyone with kids in daycare, with a nanny, etc.
http://news.morningstar.com/articlenet/article.aspx?id=539497
In particular, there are some great examples of how much less is going
to be paid in taxes one way vs. other.
The dependent care FSA let’s one put away money (through one’s
employer) on a pre-tax basis — pre-income-tax as well as pre-payroll
(SS, Medicare) tax — and use that money to pay for child care costs.
Since this saves you on taxes you’d normally pay at your marginal rate,
and our progressive tax system means your rate is higher the more you
earn, the pre-tax FSA is more valuable the more you earn.
The Federal tax credit for child care is lowers your federal taxes
(it’s a credit not a deduction) by anywhere between 35% and 20% of up
to $3000 for one child or $6000 for two or more. The percentage
declines as your AGI goes up, so this is actually more valuable the
less you make.
Morningstar shows examples at various income rates and offers the rule
of thumb that if you are in the 25% bracket (starts at $34,500 single
and $69,000 joint), you are probably best off with the FSA, though it
is possible to max out your FSA and still have room to use the tax
credit as well, especially if you have more than one qualifying
dependent.


--
David S. Meyers, CFP®
http://www.MeyersMoney.com
disclaimer: discussions in misc.invest.financial-plan are for
educational purposes only and should not be construed as financial
advice. For personal financial advice, please consult directly with a
professional.
 
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D

David S Meyers CFP

[copied from
<http://meyersmoney.wordpress.com/2012/03/26/morningstar-article-on-dependent-care-fsa-vs-tax-credit/>
]


Morningstar article on dependent-care FSA vs tax credit
A must-read from Morningstar for anyone with kids in daycare, with a
nanny, etc.

In particular, there are some great examples of how much less is going
to be paid in taxes one way vs. the other.
The dependent care FSA lets one put away money (through one’s employer)
on a pre-tax basis — pre-income-tax as well as pre-payroll (SS,
Medicare) tax — and use that money to pay for child care costs. Since
this saves you on taxes you’d normally pay at your marginal rate, and
our progressive tax system means your rate is higher the more you earn,
the pre-tax FSA is more valuable the more you earn.
The Federal tax credit for child care is lowers your federal taxes
(it’s a credit not a deduction) by anywhere between 35% and 20% of up
to $3000 for one child or $6000 for two or more. The percentage
declines as your AGI goes up, so this is actually more valuable the
less you make.
Morningstar shows examples at various income rates and offers the rule
of thumb that if you are in the 25% bracket (starts at $34,500 single
and $69,000 joint), you are probably best off with the FSA, though it
is possible to max out your FSA and still have room to use the tax
credit as well, especially if you have more than one qualifying
dependent.
Fixed a typo or two, and on the copy of this note I put up on the blog,
I've added some "more information" links, mainly to the IRS's site.
Nevertheless, I highly recommend reading the Morningstar article.

Serves me right typing early in the morning on an iPad...


--
David S. Meyers, CFP®
http://www.MeyersMoney.com
disclaimer: discussions in misc.invest.financial-plan are for
educational purposes only and should not be construed as financial
advice. For personal financial advice, please consult directly with a
professional.
 
Ad

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S

stevenricherd

David said:
On 2012-03-26 11:00:27 +0000, David S Meyers CFP said:
-
[copied from
http://tinyurl.com/85zm4ch
]


Morningstar article on dependent-care FSA vs taxÂ*credit-
-
A must-read from Morningstar for anyone with kids in daycare, with a
nanny, etc.-
-
http://news.morningstar.com/articlenet/article.aspx?id=539497-
-
In particular, there are some great examples of how much less is going

to be paid in taxes one way vs. the other.-
-
The dependent care FSA lets one put away money (through one’s
employer)
on a pre-tax basis — pre-income-tax as well as pre-payroll (SS,
Medicare) tax — and use that money to pay for child care costs. Since

this saves you on taxes you’d normally pay at your marginal rate, and

our progressive tax system means your rate is higher the more you earn,

the pre-tax FSA is more valuable the more you earn.-
-
The Federal tax credit for child care is lowers your federal taxes
(it’s a credit not a deduction) by anywhere between 35% and 20% of up

to $3000 for one child or $6000 for two or more. The percentage
declines as your AGI goes up, so this is actually more valuable the
less you make.-
-
Morningstar shows examples at various income rates and offers the rule

of thumb that if you are in the 25% bracket (starts at $34,500 single
and $69,000 joint), you are probably best off with the FSA, though it
is possible to max out your FSA and still have room to use the tax
credit as well, especially if you have more than one qualifying
dependent.-

Fixed a typo or two, and on the copy of this note I put up on the blog,

I've added some "more information" links, mainly to the IRS's site.
Nevertheless, I highly recommend reading the Morningstar article.

Serves me right typing early in the morning on an iPad...


--
David S. Meyers, CFP®
http://www.MeyersMoney.com
disclaimer: discussions in misc.invest.financial-plan are for
educational purposes only and should not be construed as financial
advice. For personal financial advice, please consult directly with a
professional.
investment plans should be verified before implementation, so as to
avoid chances of misleading, more and more people getting into the
business but don't have proper inventory system to complete the task in
lesser time.




--
stevenricherd


======================================= MODERATOR'S COMMENT:
Please keep replies relevant to the posts they are responding to, and remove unnecessary quoted material. This should have been a fresh post, and it begs a question of what, exactly, you are talking about.
 

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