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I am trying to determine which will benefit my family most and want to make sure I am considering all the tax implications.

AGI of $55k, total dependant care expenses of $2k.

Putting all $2k in a pretax account will reduce my AGI and save me at my marginal 15% Fed rate and 7.05% MN rate = $441.

Claiming all $2k as qualified expenses instead will get me 20% back as Dep Care Credit = $400.

What am I forgetting?
Thanks all.
Mosquito
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AGI of $55k, total dependant care expenses of $2k.

Putting all $2k in a pretax account will reduce my AGI and save me at my marginal 15% Fed rate and 7.05% MN rate = $441.

Claiming all $2k as qualified expenses instead will get me 20% back as Dep Care Credit = $400.

What am I forgetting?


MN may also give a credit, BUT if you use the pre-tax you also avoid SS & Medicare on the amount. No-brainer for the pre-tax account.

Phil
Rule Your Retirement Home Fool
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Putting all $2k in a pretax account will reduce my AGI and save me at my marginal 15% Fed rate and 7.05% MN rate = $441.

Claiming all $2k as qualified expenses instead will get me 20% back as Dep Care Credit = $400.

What am I forgetting?


Does MN have a state dependent care credit? NY does, and the NY version is refundable.

Are the fringe effects big enough to worry about? Say you put $2000 in a pre-tax account, but your actual spending turns out to be $1800 or $2200. What does that do to the analysis? This is not an issue if you know the expenses precisely a year in advance, but sometimes life throws changes at you. I recall the dependent care years as a series of moving from one temporary solution to another, with much less than a year's notice that I needed to find other arrangements.

Patzer
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Thanks for the quick replies.
I just looked it up and MN dep care credit has an income limit of just $37,950 so no help for me there.

I agree that knowing the exact cost a year in advance is unlikely.
Determining the amount in January for a preschool that might not start until September is hard. For the last few years I have elected an amount based on the Jan-May amounts and then when I know if/what the next term will be I can increase the amount. I have been able to get the pre-tax account amount pretty close to the total, and than use the care credit for what lttle remains.

I just wanted to be sure I wasn't missing anything, given that our relatively low income tax rate is close to the care credit rate.

Thanks again
Mosquito
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