Should I Choose Dependent Care FSA or Child Care Tax Credit

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1

Hi,

I work full time and my wife works part-time. Our combined AGI is $110,000.

I’m eligible for a dependent care FSA for 2025. We’ll have two kids in preschool and the total tuition for 2025 will be $4500. I’d like to use the FSA to cover this cost.

But I’ve found out that using the FSA might affect the tax credits.

What is the best option for me?

2

Don’t mix up the Child Tax Credit with the dependent care credit. The Child Tax Credit (worth $2,000 per child) isn’t impacted by other tax benefits you take.

You can use the DCFSA and/or dependent care credit, but you can’t count the same expenses twice.

If you have two kids and your federal tax rate is over 20%, try to put as much as you can into the DCFSA. If you have extra costs, you might also be able to use the dependent care credit.

  • For instance, if your expenses are $6,000 or more, you can put $5,000 into the DCFSA and the remaining $1,000 into the dependent care credit.
  • If your expenses are only $4,500, you can allocate all of it to the DCFSA if that’s better than the credit.
3

But the person who posted this said their total expenses are $4,500, so they shouldn’t exceed that amount.

4

Got it, thanks for clarifying.

5

So if I skip the DCFSA, I can still get a tax break with the dependent care credit, right? The DCFSA just lets me get the tax benefit sooner for 2025 instead of waiting until I file for the dependent credit in 2026?

6

The DCFSA just lets me get the tax benefit sooner for 2025 instead of waiting to file for the dependent credit

Well, you can always adjust your W-4 for the credit, so it’s not a big issue.

Another commenter mentioned you’re likely to be in the 12% tax bracket in 2025, which would make the dependent care credit better. But if bonuses or other income push you to the 22% rate, then the DCFSA might be a better choice.

7

With the FICA tax savings, the DCFSA is way better for those in the 22% bracket.

8

Right now, your income makes it better to skip the DCFSA. Since your tax rate is 12%, putting $4,500 in a DCFSA would save you $540 in taxes. Claiming $4,500 for child care on your tax return would save you $900.

You’d need to have a joint income over $127k in 2025 for the DCFSA to be a better option (this is a rough estimate since the 2025 tax brackets aren’t set yet).

9

Did you consider the FICA tax savings with the DCFSA? It doesn’t make it better, but it does help narrow the difference.

10

No, I didn’t! I thought it wasn’t exempt from FICA - thanks for pointing that out!

11

How much does that change things? Is the tax return credit still the better choice?

12

It’s $900.00 to $884.25 based on the info so far. The tax credit is still the better option at your current income for federal savings. What state do you live in?

13

Ohio. I plan to contribute $5,000 to the DCFSA since tuition will be about $4,800, and I’m sure I can find a way to spend another $200.

14

You should only contribute $4,500 to the DCFSA; you can choose the amount, and it doesn’t have to be $5,000. Just put in what you know you’ll use.

I couldn’t find a detailed guide to Ohio tax regarding the DCFSA, but you would likely save 3.75% in state taxes on that $4,500, making the DCFSA better overall.

15

Thanks for your help!

16

Thanks for this info! I just want to find the best tax scenario, and this sounds promising. We won’t hit $127k in 2025, so it seems the best choice is to claim the credit on my tax return.