Dependent Care Benefits
July 1, 2019
Children grow up fast. Unfortunately, the annual cost of caring for dependents may be growing faster. Based on recent data, the average cost of sending one infant to a child care center in the United States is $10,550 per year. Depending on your geographic location and the level of care desired, dependent care costs can skyrocket to be tens of thousands of dollars per child. These costs impact families financially, emotionally, and influence career decisions.
A major component in minimizing the financial burden of dependent care costs is the dependent care benefits offered by employers and the child and dependent care tax credit. Dependent care benefits include employer payments directly to the employee or child care provider, the fair market value of an onsite daycare facility or one sponsored by the employer, and the ability to make pre-tax contributions to a dependent care flexible spending arrangement.
To qualify for dependent care benefits, the payments must be made to cover expenses of one of the following qualified persons:
- Your child under age 13 who can be claimed as a dependent (if the child turns 13 during the year he or she is considered a qualifying person for part of the year)
- Your disabled spouse who was not physically or mentally able to care for themselves
- Any disabled person who wasn’t physically or mentally able to care for themselves whom you could claim as a dependent, except:
- The disabled person had gross income of $4,150 or more
- The disabled person filed a joint return
- You (or your spouse if filing jointly) could be claimed as a dependent
Additionally, the payments must be made to a care provider that was not one of the following:
- Your spouse or parent of the child (i.e. ex-husband or ex-wife)
- Dependent listed on your tax return
- Your own child age 18 or younger regardless of dependent status
Dependent Care Flexible Spending Arrangement
A dependent care flexible spending arrangement (FSA) allows an employee to make pre-tax contributions to the FSA and pay for qualified care expenses. To be eligible to contribute to a dependent care FSA, both the taxpayer and spouse must be working, actively seeking employment, or a full-time student. The key advantage of the account is that the appropriated wages are not subject to any payroll taxes, with possible savings up to 40% on the contributed funds. On the other hand, one critical downfall is the “use it or lose it” provision that results in forfeiture of any unused funds at the end of the plan year.
Child and Dependent Care Tax Credit
The child and dependent care tax credit is available to the extent that qualified expenses exceed the amount excluded or reimbursed by the employer. The “dollar for dollar” reduction of your tax liability is limited to 20% – 35% of qualified expenses based on your adjusted gross income; the higher your income the lower the applicable percentage. The maximum amount of qualified expenses allowable in calculating the credit is:
- $3,000 for one qualifying person
- $6,000 for two or more qualifying persons
Furthermore, to qualify for the credit, the name, address, and taxpayer identification number of the person providing the care must be furnished to the IRS on Form 2441 when filing your tax return.
The tax incentives available to those covering dependent care expenses can help relieve some of the financial burden of today’s high dollar dependent care environment. Navigating the tax planning and compliance necessary to maximize these benefits may require the assistance of a tax professional.
If you would like to speak with a tax professional in more detail regarding dependent care benefits, please contact SC&H Financial Advisors.
Advisory Services offered through SC&H Financial Advisors, Inc. SC&H Financial Advisors, Inc. is a wholly owned subsidiary of SC&H Group, Inc.
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