Child care, flex spending accounts, and taxes

It appears there is a $3000 limit on child care expenses for deducting them for federal tax purposes. If I am to believe the Turbotax calculations, this amount is irrespective of what I paid last year into a flexible spending account for this. This doesn’t quite max sense to me, I would think the FSA amount would have been deducted from the amount I paid, and the difference (up to $3000), would be the amount deductible.

Confused yet? :wink:

We paid about $4000 last year for child care, and had $1300 taken out of paychecks for a flex spending account for child care.

My question is, it seems it makes more sense to have a FSA because it is pre-tax (assuming we would have taken out $4000 over the year). Is this a loophole to technically circumvent the $3000 per child child care deduction? I chose against the FSA this year because it was an administrative pain in the butt, but if this possible loophole is legit, I may do it again next year.

I work in benefits systems although I have only done it for a few months. Those aren’t loopholes. That is what they are designed for.

Money put into several types of spending accounts isn’t subject to federal tax. You can mix and match them with other tax benefits as you see fit. If that happens to double up with other tax benefits, so-be it.

There is nothing unethical about doing that and the government knows it is there. Most people don’t take advantage of spending accounts at all but they can be a huge benefit.

You can consult with a tax professional to see how to best maximize them.

One big catch is that unused money can sometimes be taken away from you at the end of the year.

Hubby and I can put up to 2500 each in the dependent care piece of our 125 plan (the medical piece is unlimited). Any unused funds in the 125 do go back to the company at the end of the plan year, but we plan very well and have almost no medical left.

It makes great sense- why pay taxes on money you don’t keep? We save 18% right off the top by using the 125 plan.

18%? Wait, where did I get that number?!? I think our fed tax bracket is more like 30%!


I used TaxCut for filing the year 2004 when I had an active Flex account for daycare. I figured it perfectly and it worked great! I loved getting all the money back “tax free”.

I questioned that limit that you mentioned and even paid TaxCut to ask about it. Nope, no more credit regardless of what you actually spent on childcare. Bummer. I had spent close to $13K. Didn’t matter.

If I ever go back to work full-time, I’ll definitely take advantage of the tax break again.

IANATA but I’ve been using FSAs for 10 years. I was a little confused by the OP until I looked up some forms. You are not deducting child care expenses, you are applying for a credit. There is a big difference.

I recommend the FSA, because it’s pre-tax and you can not otherwise get a deduction for child care expenses; there is no Schedule A deduction for child care. I cannot think of any reason not to do it, unless your child care expenses will be highly uncertain (and you end up contributing too much; see Shagnasty’s post).

Beyond the OP I am confused about one thing. Let’s say you have $3000 in child care expenses for one child, and you use an FSA for all $3000 of the expenses. You have effectively had your income reduced by $3000 for tax purposes, so you reduced your taxes. So you can still take the full $3000 credit? Am I interpreting this right?

Compare two people who are exactly the same, except one has $3000 of child care expenses and the other has zero. The person with the child gets the credit. So, taking the credit into account, the guy with no kids has income $X, and the guy with kids nets out $X - $3000 in child care + $3000 tax credit = $X. So they are on an even footing so far. OK, Uncle Sam effectively paid for one guy’s child care.

But when you add the FSA into the mix, the guy with child care is paying taxes on $X - $3000 pre-tax FSA contributions, or less tax than the guy with no kids. Why should that be?

That doesn’t sound right. . .what am I getting wrong?

And you will also save your state tax and your social security contributions (if you earn less than the social security ceiling), so the saving is even higher.

Apologies for the minor hijack.

Where does the money go? Does Uncle Sam get it?

Are there any statistics available that show how much money is wasted in FSAs each year?

The employer gets it.