Hi,

My employer provides me a Dependent care Flex Spending Account
benefit.   I cana put up to $5,000 into this annually.  I understand,
however, that I can also claim dependent care deduction when I file my
taxes.

What is the benefit of using the Flex Spending Count rather than just
claiming the deduction at tax time?

There is a lot of paperwork around this including sending in forms to
get the money out on a regular basis.  Plus my employers plan was
ruled discriminatory and my benefits were reduced this year ? it?s a
hassle so I would prefer not to use it if I can just claim the
deduction at the same amount.

Thanks!!

Hello and thank you for your question.

The advantage of participating in your employer's Flex Plan is that
besides not paying income tax on that portion of the funds you spend
on child care, you also won't pay social security and Medicare
employment tax on those amounts.

"Advantages of participation:  

Total tax avoidance for FICA, Federal, and State taxes. 

The ability to deduct dependent care expenses from your taxes
decreases as income increases. By participating in the flexible
spending account, you have the advantage of avoiding the taxes
regardless of income.

While dependent care expenses are tax deductible up to certain levels,
participation in the spending account also lets you avoid the 7.65%
FICA tax."
http://www.uiowa.edu/hr/benefits/spendingacct/gen_dependent.html

As you note in your question, that's really the only extra savings
(assuming your income tax bracket allows you to make full use of the
credit if you don't participate in the Flex plan.

So that's the choice - - extra paperwork and risk, to save the 7.65% FICA tax.

Thanks again for letting us help.

Search terms used:
Dependent care limits Spending Account advantage

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Request for Answer Clarification by goldsta-ga on 28 Nov 2006 14:15 PST

I'm in a high tax bracket with a family income ~$200k.  Does that mean
I should  definitely do the Dependant Care FSA?

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Clarification of Answer by richard-ga on 30 Nov 2006 15:29 PST

Yes.
"Child and dependent care credit. Two-income households with children
under 13 years old qualify for a dependent-care credit to help cover
child-care expenses. The IRS allows working parents and those looking
for a job (students and disabled parents also qualify) a credit of 20%
to 35% on expenses up to $3,000 in child care for one kid and $6,000
for two or more kids. This translates into a maximum credit of $1,050
for one child and $2,100 for two or more kids.

The credit for parents earning more than $43,000 shrinks to just $600
for one child and $1,200 for two or more kids. Bernard Kent, a partner
with PricewaterhouseCooper, recommends higher-income taxpayers set
aside pretax dollars in an employer's flexible spending account
instead."
http://finance.comcast.net/personalfinance/view.html?x=consumer/20040513

The advantage of such flex accounts is they're paid from pre-taxed
dollars. Thus if your salary is, say, $25,000 a year and you put
$5,000 in the fund, you pay taxes as if you earned $20,000. This is a
definite advantage if you take the standard deduction. If you itemize,
the advantages are going to depend on your particular situation. I
chose not to go with a flex fund because the advantages are so minimal
as to not be worth the hassle, but there's no way to know if the same
would be true for you without knowing your tax bracket and other
financial information.

Another factor is that dependent care expenses are not taken as a
deduction, but as a credit. The credit rate varies from 35-20%,
depending on AGI. Also, EIC is affected by earned income. If you're
getting EIC, using a flex spending acocunt will lower your taxable
earned income & get you more EIC.