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I am trying to talk my employer into offering these, and they had a couple of questions (they haven't talked to the accountant yet) that I was unable to answer definitively:

1) From what I can gather, you CAN double-dip; use both the FSA to use pre-tax funds AND take a credit for the amount over that spent on child care. So, let's say you spent $7000 - you would be able to use $5000 pre-tax money on that and then also take $2000 into consideration for the child care credit, right? Since the cap on the credit is $3000 in expenses, this sounds....extraordinarily fantastic, and from my readings of publications that sounds like exactly what you are able to do.

2) Would this pre-tax contribution change gross income in a way to qualify for EIC? So let's pretend Person A makes $35000 a year, and puts $5000 into an FSA for child care expenses - does this adjust their income down to $30000 for EIC purposes, therefore qualifying them for EIC?

Thanks for any guidance!

impolite
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1) From what I can gather, you CAN double-dip; use both the FSA to use pre-tax funds AND take a credit for the amount over that spent on child care. So, let's say you spent $7000 - you would be able to use $5000 pre-tax money on that and then also take $2000 into consideration for the child care credit, right?

Wrong.

First, you limit the child care expenses under consideration to $3000 for one child, $6000 for two or more. Then you subtract off any expenses paid thru an FSA. What's left is available for the child care credit.

So I guess you can get a little bit of a double dip. You can exclude $5k from income AND take a credit for the last $1k of expenses.

I'll have to leave the EIC question to our VITA gurus. I don't see it often enough to recall off the top of my head.

--Peter
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2) Would this pre-tax contribution change gross income in a way to qualify for EIC? So let's pretend Person A makes $35000 a year, and puts $5000 into an FSA for child care expenses - does this adjust their income down to $30000 for EIC purposes, therefore qualifying them for EIC?

Yes. See page 46 of the 1040 instructions for the calculation of EITC earned income.

Phil
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So I guess you can get a little bit of a double dip. You can exclude $5k from income AND take a credit for the last $1k of expenses.


From a similar discussion elsewhere...

This year will be the first year I will be able to prove payment of all daycare expenses for both kids. Our decree states we each get one kid as a dependent on our taxes. So, he will be claiming one, but I will also have daycare expenses for the one that he claims.

Since he will not be claiming daycare expenses, can I claim expenses on that child even if I cannot list him as a dependent? I can prove his address is mine, but we *legally* have joint custody - mine is the primary residence and the one used for education purposes and most living time, and I am to be given child support. I pay daycare directly.

Also, what about years where I have unbalanced amounts? Could I still take $5k pre-tax and the $1k credit even if the expenses were over $3k for one kid and under $3k for the other?

Assuming my employer implements and I can fully fund $5k by the end of the year, if I can claim this second child's expenses I would still be able to use $1k for the credit this year and for a few more years.

impolite
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Also, what about years where I have unbalanced amounts? Could I still take $5k pre-tax and the $1k credit even if the expenses were over $3k for one kid and under $3k for the other?

Yes.

--Peter
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