Child care account a tax saver

Kathleen Pender San Francisco Chronicle

As if holding down a job and raising kids isn't stressful enough, many working parents are scrambling to make an important tax decision: whether to participate in their employer's flexible spending account for child care expenses or take the child care tax credit.

Here's the short answer: If you, or you and your spouse together, make more than $43,000 a year, it is usually better to put as much as you can, up to $5,000, into your flexible spending account.

Even if you make less than $43,000, it might be better to use the workplace account.

An added bonus: If you have two or more children and spend at least $6,000 on child care, you can put $5,000 into your account at work and use the tax credit against $1,000 in expenses, saving an additional $200 or more.

Flexible spending accounts, also called dependent care accounts, let you direct part of your salary before taxes into an account for child care expenses. As you pay for day care, you submit proof of your expenses and get reimbursed.

You can put up to $5,000 into your account, no matter how many children you have.

The dependent care account cuts your taxes by reducing your reported salary.

The tax credit, by comparison, reduces your income taxes, dollar for dollar. You claim the credit when you file your taxes.

The credit is based on your adjusted gross income.

In this case, the less you make, the more you save.

The credit ranges from 20 percent if your income, single or joint, is above $43,000 to 35 percent if your income is below $15,000.

Tax expert Bob Scharin, an analyst with Thomson Tax & Accounting, says it's hard to imagine someone who would be better off using the tax credit than the dependent care account.

If you are in a very low income bracket, the credit might look better, he says. However, if you have very low income, you probably don't pay income taxes.

source: www.azcentral.com

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