Tag: tax-planning

If you pay for daycare, preschool, before/after care, or summer camp so you can work, you have two ways the tax code can help:

1. The Dependent Care FSA offered through your employer, and
2. The Dependent Care Tax Credit you claim on your tax return.

A lot of parents default to the Dependent Care Tax Credit because they go through the year paying for child care, then they are asked by their tax preparer or Turbo Tax if they paid for child care, and then they put in for the credit. But in most real-world situations, the Dependent Care FSA saves you significantly more money — and the savings happen all year long through your paycheck, not just at tax time.

Here’s why.

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What Is a Dependent Care FSA?

A Dependent Care Flexible Spending Account lets you set aside up to $7,500 per household per year in 2025 (or $3,750 if married filing separately) from your paycheck before taxes to pay for qualifying childcare expenses.

You then use those pre-tax dollars you put into the FSA account to reimburse yourself for eligible childcare costs.

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What Is the Dependent Care Tax Credit?

The Dependent Care Credit is claimed when you file your tax return. It allows you to claim a percentage of childcare expenses, up to:

• $3,000 of expenses for one child
• $6,000 of expenses for two or more children

The credit percentage ranges from 20% to 35%, but depending on your income, but if you’re adjusted gross income is above $43,000, then you’re going to be limited to the 20%. That means you’re only saving $1,200 per year by claiming the credit.

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Why the FSA Usually Saves More

Here’s the key difference:

• The tax credit reduces your tax bill by a percentage of expenses.
• The FSA removes the income from taxation entirely.

That’s a big deal.

Example

Let’s say a married couple earns $150,000 per year and has two kids in daycare.

At this income level, they’re likely in the 24% federal tax bracket.

If they use the full $7,500 Dependent Care FSA in 2025:

They avoid paying roughly:

• 24% federal income tax
• 7.65% Social Security & Medicare
• 4.95% Illinois state income tax

That’s about 36.6% in total tax savings.

34.6% of $7,500 = $2,595 in real savings

Now compare that to the Dependent Care Tax Credit:

Even though they can claim up to $6,000 of expenses for two children, at their income level the credit is 20%.

20% of $6,000 = $1,200

The FSA saves them well over double what the tax credit provides.

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Another Big Advantage: Timing

With the FSA, you save taxes every paycheck. Your take-home pay is higher throughout the year.

With the credit, you wait until you file your tax return to see the benefit.

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Can You Use Both?

Yes and no. The amount used for the FSA reduces the amount used towards the credit. If you use the full $7,500 for the FSA, then you are already above the $6,000 for the credit, so you cannot claim the credit. But if you use only $5,000 for the FSA, then you still have $1,000 that can be used for the credit.

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Why Many Parents Miss This

A lot of employees skip the Dependent Care FSA during open enrollment because:

• They don’t know it exists
• They don’t understand how it works
• They assume the tax credit is “good enough”
• HR doesn’t explain this benefit
• They’re worried about the “use it or lose it” rule

But for parents already spending well over $7,500 per year on childcare, the FSA is often one of the best tax moves available through an employer benefit plan.

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Bottom Line

If you’re paying for childcare so you can work and your employer offers a Dependent Care FSA, it’s usually more valuable than relying on the Dependent Care Tax Credit alone.

The FSA lets you pay for childcare with pre-tax dollars, often saving 30% or more on expenses you’re already paying anyway.

If you’re not sure how to coordinate the FSA and the tax credit for maximum benefit, this is one of those areas where a little planning can lead to meaningful savings.