John M. Hoffman & Associates CPAs

Frequently Asked Tax Questions

Child Care / Dependent Care Benefits

"Which of the two works best?"

It depends on the situation. Generally the dependent care benefits works the best. The biggest pitfall is the "use it or lose it" nature of setting aside that much money at your place of employment. Should circumstances change, and you don't incur the qualified day care, you can lose that set aside money.

However, for a couple with only one child, a $5,000 reduction in their wages, trickles down to at least a $5,000 reduction in their taxable income. If they are in a 25% tax bracket, that results in a tax savings of $1,250 where those same taxpayers would be limited to a 20% credit on $3,000 of expenditures, reducing their taxes by only $600. Obviously in that case the dependent care benefits are much more valuable.

For a couple with two children that might get a tax credit of $1,000 on the same $5,000 expenditure they might decide that the extra effort of doing this at their place of employment is not worth the extra $250 of tax savings. Keep in mind that if these taxpayers are in a 35% tax bracket, the $5,000 of reduced wages saves at least $1,750 in taxes - something to think about.