Credit Or Debit — How To Pay Your Dependent Care Costs
February 01, 2017Paper or plastic? Credit or debit? Common questions you hear at the grocery store, but do you consider what is the best way, credit or debit, when it comes to paying for dependent care?
Dependent care tax credit or pre-tax dependent care?
I don’t mean actually charging the cost to a credit card – what I am referring to is whether to take the Child and Dependent Care tax credit at the end of the year on your tax return, or to have the funds withheld (debited) pre-tax from your payroll using the Dependent Care Flexible Spending Account.
Your tax bracket will determine
The best answer to this is based on what your marginal federal tax bracket is.
For employees in either the 10% or 12% federal tax bracket, it may make more sense to take the credit at the end of the year and steer away from the payroll deduction. You may actually qualify for up to a 35% tax credit of up to $3,000 per child (maximum of 2, or $6,000). Here are some examples at various income limits:
AGI up to $15,000 = 35% credit
AGI $23,000 to $25,000 = 30% credit
AGI $33,000 to $35,000 = 25% credit
AGI over $43,000 = 20% credit
For employees in the 22% or higher federal tax bracket, it probably makes more sense for you to take advantage of the payroll deduction option. If you’re in the 12%, it will depend on where your income falls on the scale. As income increases, the federal tax credit phases down to only a 20% tax credit so your savings from avoiding paying tax altogether on the funds is higher than the credit you would have been eligible for.
Not just federal tax savings
This tax savings not only includes your federal and most state income taxes, but also the 7.65% FICA tax for Social Security and Medicare. Plus, you can contribute as much as $5,000 to the Dependent Care Flexible Spending Account (DCFSA), even if you only have 1 child. Some employers even match funds going into the DCFSA, so check with your HR Dept to see if this applies.