Benjamin Franklin once famously said how nothing in the world is certain except for death and taxes. However, this should not stop you from understanding the tax laws so that you can best legally minimize the taxes you pay.
The ins-and-outs of both a Dependent Care Flexible Spending Account and the Child and Dependent Care Tax Credit have already been thoroughly discussed. Reading these articles first will help you have the foundation you need to sufficiently digest the information covered here.
The calculations performed in this article will help you decide if prioritizing use of a Dependent Care Flexible Spending Account or receiving the Child and Dependent Care Tax Credit might be in your best interest.
This is a much longer article compared to the length of my other articles. However, don’t let all of the example calculations covered overwhelm you – they are just there in an attempt to provide a scenario for as much different physical therapists in as many different financial situations possible. Instead, just focus on the example that most pertains to you.
Let’s get started.
GROUND RULES:
Before making comparisons between how much you could save using a Dependent Care Flexible Spending Account or by receiving the Child and Dependent Care Tax Credit, let’s talk ground rules.
Please keep in mind the following information for the below calculations:
1. All calculations were performed assuming your company has adopted all of the new 2021 values for the Dependent Care Flexible Spending Account.
2. All calculations were performed assuming that you have enough eligible expenses to both contribute the maximum to your Dependent Care Flexible Spending Account and to get the maximum allowable credit for the Child and Dependent Care Tax Credit.
3. These calculations do not take into account additional potentially important personalized factors that might be relevant to your specific situation.
4. As we are approaching the month of December, please keep in mind that it is up to your employer to provide their employees with the opportunity to rollover their entire remaining Dependent Care Flexible Spending Account balance from the end of 2021 to the end of 2022. This is more thoroughly covered in the Dependent Care Flexible Spending Account article.
5. While a great deal of time was invested to ensure accuracy of all figures, these calculations are simply to provide an educational purpose. The calculations are not exhaustive and they are not intended to represent or replace any form of tax, legal, financial, investment or otherwise expert advice. In the end, these calculations are just to provide you with basic insight and it is still recommended that you consult a trusted expert for your individual needs.
CALCULATIONS FOR FILING SINGLE WITH ONE CHILD:
Scenario #1:
Filing Status: Single
Number of Children: 1
Adjusted Gross Income: $125,000
State Living In: California
Dependent Care Flexible Spending Account:
For Single Filers: $10,500
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. But first, please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if income is at or below $142,800 for year 2021
– 1.45 percent must be paid to Medicare no matter what your income is
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
7.65 percent Social Security and Medicare tax
24 percent federal income tax
+ 9.30 percent state income tax
40.95 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, you avoid paying 40.95 percent of taxes on that amount of money.
This saves you 40.95 percent x $10,500 = $4,299.75
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for one qualifying individual: $8,000
Since your Adjusted Gross Income is $125,000 then the credit rate is 50%
$8,000 tax credit amount x 50 percent = a total of $4,000 of actual tax credit
Final Verdict:
This one came out fairly close, but the $4,299.75 in Dependent Care Flexible Account potential would be more money saved than the $4,000 in Child and Dependent Care Tax Credit.
Therefore, this individual would save $299.75 ($4,299.75 – $4,000.00) more by contributing the maximum to a Dependent Care Flexible Spending Account first. After that, they should use the rest of their eligible expenses to get up to $4,000 Child and Dependent Care Tax Credit.
Scenario #1 – Special Case: Alternative Scenario of Living in a Different State:
Let’s say everything stayed the same in the above Scenario #1, except that this individual now lived in Texas instead of California. This changes things since Texas (along with Alaska, Florida, Nevada, South Dakota, Tennessee, Washington and Wyoming) is a state without any state income tax.
7.65 percent Social Security and Medicare tax
24 percent federal income tax
+ 0 percent state income tax (Note: Used Texas’s state tax rate)
31.65 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, this individual would avoid paying 31.65% of taxes on that amount of money.
This only saves you 31.65 percent x $10,500 = $3,323.25
Final Verdict:
The $3,323.25 that can be saved with a maximum contribution to the Dependent Care Flexible Spending Account is now less than the $4,000 this individual could save by first getting the maximum Child and Dependent Care Tax Credit.
With that in mind, this individual should first aim to get the maximum Child and Dependent Care Tax Credit. After this, then he or she can then utilize the Dependent Care Flexible Spending Account with any further eligible expenses.
Scenario #2:
Filing Status: Single
Number of Children: 1
Adjusted Gross Income: $200,000
State Living In: California
Dependent Care Flexible Spending Account:
For Single Filers: $10,500
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. But first, please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if income is at or below $142,800 for year 2021 and if income exceeds this then the Social Security tax incurred is no more than 6.2 percent of $142,800 which is $8,853.60. However, for the sake of simplicity, the below calculation will just utilize the full 6.2% of the entire income, slightly over-estimating the amount of income paid in Social Security taxes.
– 1.45 percent must be paid to Medicare no matter what your income is
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
7.65 percent Social Security and Medicare tax
32 percent federal income tax
+ 9.30 percent state income tax
48.95 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, you avoid paying 48.95 percent of taxes on that amount of money.
This saves you 48.95 percent x $10,500 = $5,139.75
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for one qualifying individual: $8,000
Since your Adjusted Gross Income is $200,000, this falls between $183,000 to $400,000. Therefore, the credit rate is 20 percent.
$8,000 tax credit amount x 20 percent = a total of $1,600 of actual tax credit
Final Verdict:
The $5,139.75 in Dependent Care Flexible Account potential would be more money saved than the $1,600 in Child and Dependent Care Tax Credit.
Therefore, this individual would save $3,539.75 ($5,139.75 – $1,600.00) more by contributing the maximum to a Dependent Care Flexible Spending Account first. After that, he or she should use the rest of his or her eligible expenses to get up to $1,600.00 Child and Dependent Care Tax Credit.
Scenario #3:
Filing Status: Single
Number of Children: 1
Adjusted Gross Income: $438,000
State Living In: California
Dependent Care Flexible Spending Account:
For Single Filers: $10,500
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. But first, please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if income is at or below $142,800 for year 2021 and if income exceeds this then the Social Security tax incurred is no more than 6.2 percent of $142,800 which is $8,853.60. However, for the sake of simplicity, the below calculation will just utilize the full 6.2% of the entire income, slightly over-estimating the amount of income paid in Social Security taxes.
– 1.45 percent must be paid to Medicare no matter what your income is
– 0.9 percent must additionally be paid to Medicare since your income is greater than $200,000 and filing as single
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
8.55 percent Social Security and Medicare tax
35 percent federal income tax
+ 11.30 percent state income tax
54.85 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, you avoid paying 54.85 percent of taxes on that amount of money.
This saves you 54.85 percent x $10,500 = $5,759.25
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for one qualifying individual: $8,000
Since your Adjusted Gross Income is $438,000, the credit rate is 0 percent.
$8,000 tax credit amount x 0 percent = a total of $0 of actual tax credit
Final Verdict:
This one is easy, since this individual does not qualify for any amount of Child and Dependent Care Tax Credit. However, he or she does save $5,759.25 when contributing the maximum allowed to his or her Dependent Care Flexible Spending Account.
Therefore, this individual should make all contributions towards the Dependent Care Flexible Spending Account and anticipate not getting any Child and Dependent Care Tax Credit.
CALCULATIONS FOR FILING SINGLE WITH TWO OR MORE CHILDREN:
Scenario #4:
Filing Status: Single
Number of Children: 2 or more
Adjusted Gross Income: $125,000
State Living In: California
Dependent Care Flexible Spending Account:
For Single Filers: $10,500
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. But first, please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if income is at or below $142,800 for year 2021
– 1.45 percent must be paid to Medicare no matter what your income is
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
7.65 percent Social Security and Medicare tax
24 percent federal income tax
+ 9.30 percent state income tax
40.95 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, you avoid paying 40.95 percent of taxes on that amount of money.
This saves you 40.95 percent x $10,500 = $4,299.75
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $16,000
Since your Adjusted Gross Income is $125,000, the credit rate is 50 percent.
$16,000 tax credit amount x 50 percent = a total of $8,000 of actual tax credit
Final Verdict:
The $4,299.75 in Dependent Care Flexible Account potential would be less money saved than the $8,000 in Child and Dependent Care Tax Credit.
Therefore, this individual would save $3,700.25 ($8,000.00 – $4,299.75) more by getting the Child and Dependent Care Tax Credit first. After that, he or she should aim to contribute the maximum to a Dependent Care Flexible Spending Account.
Scenario #5:
Filing Status: Single
Number of Children: 2 or more
Adjusted Gross Income: $200,000
State Living In: California
Dependent Care Flexible Spending Account:
For Single Filers: $10,500
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. But first, please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if income is at or below $142,800 for year 2021 and if income exceeds this then the Social Security tax incurred is no more than 6.2 percent of $142,800 which is $8,853.60. However, for the sake of simplicity, the below calculation will just utilize the full 6.2% of the entire income, slightly over-estimating the amount of income paid in Social Security taxes.
– 1.45 percent must be paid to Medicare no matter what your income is
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
7.65 percent Social Security and Medicare tax
32 percent federal income tax
+ 9.30 percent state income tax
48.95 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, you avoid paying 48.95 percent of taxes on that amount of money.
This saves you 48.95 percent x $10,500 = $5,139.75
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $16,000
Since your Adjusted Gross Income is between $183,000 and $400,000, the credit rate is 20 percent.
$16,000 tax credit amount x 20 percent = a total of $3,200 of actual tax credit
Final Verdict:
The $5,139.75 in Dependent Care Flexible Account potential would be more money saved than the $3,200 in Child and Dependent Care Tax Credit.
Therefore, this individual would save $1,939.75 ($5,139.75 – $3,200.00) more by contributing the maximum to his or her Dependent Care Flexible Spending Account first. After that, he or she should aim to get the Child and Dependent Care Tax Credit.
Scenario #6:
Filing Status: Single
Number of Children: 2 or more
Adjusted Gross Income: $438,000
State Living In: California
Dependent Care Flexible Spending Account:
For Single Filers: $10,500
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. But first, please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if income is at or below $142,800 for year 2021 and if income exceeds this then the Social Security tax incurred is no more than 6.2 percent of $142,800 which is $8,853.60. However, for the sake of simplicity, the below calculation will just utilize the full 6.2% of the entire income, slightly over-estimating the amount of income paid in Social Security taxes.
– 1.45 percent must be paid to Medicare no matter what your income is
– 0.9 percent must additionally be paid to Medicare since your income is greater than $200,000 and filing as single
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
8.55 percent Social Security and Medicare tax
35 percent federal income tax
+ 11.30 percent state income tax
54.85 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, you avoid paying 54.85 percent of taxes on that amount of money.
This saves you 54.85 percent x $10,500 = $5,759.25
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $16,000
Since your Adjusted Gross Income is $438,000, the credit rate is 0 percent.
$16,000 tax credit amount x 0 percent = a total of $0 of actual tax credit
Final Verdict:
Much like Scenario #3, this individual does not qualify for any amount of Child and Dependent Care Tax Credit. However, he or she does save $5,759.25 when contributing the maximum allowed to his or her Dependent Care Flexible Spending Account.
Therefore, this individual should make all contributions towards the Dependent Care Flexible Spending Account and anticipate not getting any Child and Dependent Care Tax Credit.
CALCULATIONS FOR A MARRIED COUPLE FILING JOINTLY WITH ONE CHILD:
Scenario #7:
Filing Status: Married Couple Filing Jointly
Number of Children: 1
Adjusted Gross Income: $125,000
State Living In: California
Dependent Care Flexible Spending Account:
For Married Couple Filing Jointly: $10,500
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. Please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if income is at or below $142,800 for year 2021
– 1.45 percent must be paid to Medicare no matter what your income is
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
7.65 percent Social Security and Medicare tax
22 percent federal income tax
+ 9.30 percent state income tax
38.95 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, you avoid paying 38.95 percent of taxes on that amount of money.
This saves you 38.95 percent x $10,500 = $4,089.75
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $8,000
Since your Adjusted Gross Income is $125,000, the credit rate is 50 percent.
$8,000 tax credit amount x 50 percent = a total of $4,000 of actual tax credit
Final Verdict:
This one is close. The $4,089.75 in Dependent Care Flexible Account potential would be more money saved than the $4,000 in Child and Dependent Care Tax Credit.
Therefore, this married couple would save $89.75 ($4,089.75 – $4,000.00) more by getting the Child and Dependent Care Tax Credit first. After that, they should aim to contribute the maximum to a Dependent Care Flexible Spending Account.
Scenario #8:
Filing Status: Married Couple Filing Jointly
Number of Children: 1
Adjusted Gross Income: $250,000
State Living In: California
Dependent Care Flexible Spending Account:
For Married Couple Filing Jointly: $10,500
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. Please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if one of the spouse’s income is at or below $142,800 for year 2021. Therefore, this couple should have the Dependent Care Flexible Spending Account under that spouse. If the Dependent Care Flexible Spending Account is under the spouse with an income greater than $142,800, then the Social Security tax incurred is no more than 6.2 percent of $142,800 which is $8,853.60. If this is the case, for the sake of simplicity, the below calculation will still just utilize 6.2% of the entire income, which slightly over-estimates the amount of income paid in Social Security taxes.
– 1.45 percent must be paid to Medicare no matter what your income is
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
7.65 percent Social Security and Medicare tax
35 percent federal income tax
+ 9.30 percent state income tax
51.95 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, you avoid paying 51.95 percent of taxes on that amount of money.
This saves you 51.95 percent x $10,500 = $5,454.75
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $8,000
Since your Adjusted Gross Income is $250,000, this falls between $183,000 and $400,000. Therefore, credit rate is 20 percent.
$8,000 tax credit amount x 20 percent = a total of $1,600 of actual tax credit
Final Verdict:
The $5,454.75 in Dependent Care Flexible Account potential would be more money saved than the $1,600 in Child and Dependent Care Tax Credit.
Therefore, this married couple would save $3,854.75 ($5,454.75 – $1,600.00) more by contributing the maximum to their Dependent Care Flexible Spending Account first. After that, they should aim to get the Child and Dependent Care Tax Credit.
Scenario #9:
Filing Status: Married Couple Filing Jointly
Number of Children: 1
Adjusted Gross Income: $438,000
State Living In: California
Dependent Care Flexible Spending Account:
For Married Couple Filing Jointly: $10,500
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. Please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if one of the spouse’s income is at or below $142,800 for year 2021. Therefore, this couple should have the Dependent Care Flexible Spending Account under that spouse. If the Dependent Care Flexible Spending Account is under the spouse with an income greater than $142,800, then the Social Security tax incurred is no more than 6.2 percent of $142,800 which is $8,853.60. If this is the case, for the sake of simplicity, the below calculation will still just utilize 6.2% of the entire income, which slightly over-estimates the amount of income paid in Social Security taxes.
– 1.45 percent must be paid to Medicare no matter what your income is
– 0.9 percent must be paid to Medicare since income is greater than $250,000 married filing jointly
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
8.55 percent Social Security and Medicare tax
35 percent federal income tax
+ 9.30 percent state income tax
52.85 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, you avoid paying 52.85 percent of taxes on that amount of money.
This saves you 52.85 percent x $10,500 = $5,549.25
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $8,000
Since your Adjusted Gross Income is $438,000, the credit rate is 0 percent.
$8,000 tax credit amount x 0 percent = a total of $0 of actual tax credit
Final Verdict:
Much like Scenarios #3 and #6, this married couple does not qualify for any amount of Child and Dependent Care Tax Credit. However, they do save $5,549.25 when contributing the maximum allowed to their Dependent Care Flexible Spending Account.
Therefore, they should make all contributions towards the Dependent Care Flexible Spending Account and anticipate not getting any Child and Dependent Care Tax Credit.
CALCULATIONS FOR A MARRIED COUPLE FILING JOINTLY WITH TWO OR MORE CHILDREN:
Scenario #10:
Filing Status: Married Couple Filing Jointly
Number of Children: 2
Adjusted Gross Income: $125,000
State Living In: California
Dependent Care Flexible Spending Account:
For Married Couple Filing Jointly: $10,500
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the following taxes:
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. Please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if income is at or below $142,800 for year 2021
– 1.45 percent must be paid to Medicare no matter what your income is
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
7.65 percent Social Security and Medicare tax
22 percent federal income tax
+ 9.30 percent state income tax
38.95 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, you avoid paying 38.95 percent of taxes on that amount of money.
This saves you 38.95 percent x $10,500 = $4,089.75
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $16,000
Since your Adjusted Gross Income is $125,000, the credit rate is 50 percent.
$16,000 tax credit amount x 50 percent = a total of $8,000 of actual tax credit
Final Verdict:
The $4,089.75 in Dependent Care Flexible Account potential would be less money saved than the $8,000 in Child and Dependent Care Tax Credit.
Therefore, this married couple would save $3,910.25 ($8,000.00 – $4,089.75) more by getting the Child and Dependent Care Tax Credit first. After that, they should aim to contribute the maximum to a Dependent Care Flexible Spending Account.
Scenario #11:
Filing Status: Married Couple Filing Jointly
Number of Children: 2
Adjusted Gross Income: $250,000
State Living In: California
Dependent Care Flexible Spending Account:
For Married Couple Filing Jointly: $10,500
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the following taxes:
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. Please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if one of the spouse’s income is at or below $142,800 for year 2021. Therefore, this couple should have the Dependent Care Flexible Spending Account under that spouse. If the Dependent Care Flexible Spending Account is under the spouse with an income greater than $142,800, then the Social Security tax incurred is no more than 6.2 percent of $142,800 which is $8,853.60. If this is the case, for the sake of simplicity, the below calculation will still just utilize 6.2% of the entire income, which slightly over-estimates the amount of income paid in Social Security taxes.
– 1.45 percent must be paid to Medicare no matter what your income is
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
7.65 percent Social Security and Medicare tax
24 percent federal income tax
+ 9.30 percent state income tax
40.95 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, you avoid paying 40.95 percent of taxes on that amount of money.
This saves you 40.95 percent x $10,500 = $4,299.75
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $16,000
Since your Adjusted Gross Income is $250,000, this falls between $183,000 and $400,000. Therefore, the credit rate is 20 percent.
$16,000 tax credit amount x 20 percent = a total of $3,200 of actual tax credit
Final Verdict:
The $4,299.75 in Dependent Care Flexible Account potential would be more money saved than the $3,200 in Child and Dependent Care Tax Credit.
Therefore, this married couple would save $1,099.75 ($4,299.75 – $3,200.00) more by contributing the maximum to their Dependent Care Flexible Spending Account first. After that, they should aim to get the Child and Dependent Care Tax Credit.
Scenario #12:
Filing Status: Married Couple Filing Jointly
Number of Children: 2
Adjusted Gross Income: $438,000
State Living In: California
Dependent Care Flexible Spending Account:
For Married Couple Filing Jointly: $10,500
If you had enough eligible expenses to contribute the maximum allowed $10,500 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. Please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if one of the spouse’s income is at or below $142,800 for year 2021. Therefore, this couple should have the Dependent Care Flexible Spending Account under that spouse. If the Dependent Care Flexible Spending Account is under the spouse with an income greater than $142,800, then the Social Security tax incurred is no more than 6.2 percent of $142,800 which is $8,853.60. If this is the case, for the sake of simplicity, the below calculation will still just utilize 6.2% of the entire income, which slightly over-estimates the amount of income paid in Social Security taxes.
– 1.45 percent must be paid to Medicare no matter what your income is
– 0.9 percent must be paid to Medicare since income is greater than $250,000 married filing jointly
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
8.55 percent Social Security and Medicare tax
35 percent federal income tax
+ 9.30 percent state income tax
52.85 percent total taxes saved
Therefore, by contributing $10,500 into a Dependent Care Flexible Spending Account, you avoid paying 52.85 percent of taxes on that amount of money.
This saves you 52.85 percent x $10,500 = $5,549.25
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $16,000
Since your Adjusted Gross Income is $438,000, the credit rate is 0 percent.
$16,000 tax credit amount x 0 percent = a total of $0 of actual tax credit
Final Verdict:
Much like Scenarios #3, #6 and #9, this married couple does not qualify for any amount of Child and Dependent Care Tax Credit. However, they do save $5,549.25 when contributing the maximum allowed to their Dependent Care Flexible Spending Account.
Therefore, they should make all contributions towards the Dependent Care Flexible Spending Account and anticipate not getting any Child and Dependent Care Tax Credit.
CALCULATIONS FOR A MARRIED COUPLE FILING SEPARATELY WITH ONE CHILD:
Scenario #13:
Filing Status: Married Couple Filing Separately
Number of Children: 1
Adjusted Gross Income: $125,000
State Living In: California
Dependent Care Flexible Spending Account:
For Married Couple Filing Separately: $5,250
If you had enough eligible expenses to contribute the maximum allowed $5,250 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. Please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if income is at or below $142,800 for year 2021
– 1.45 percent must be paid to Medicare no matter what your income is
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
7.65 percent Social Security and Medicare tax
24 percent federal income tax
+ 9.30 percent state income tax
40.95 percent total taxes saved
Therefore, by contributing $5,250 into a Dependent Care Flexible Spending Account, you avoid paying 40.95 percent of taxes on that amount of money.
This saves you 40.95 percent x $5,250 = $2,149.88
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $8,000
Since your Adjusted Gross Income is $125,000, the credit rate is 50 percent.
$8,000 tax credit amount x 50 percent = a total of $4,000 of actual tax credit
Final Verdict:
The $2,149.75 in Dependent Care Flexible Account potential would be less money saved than the $4,000 in Child and Dependent Care Tax Credit.
Therefore, this married but separately filed couple would save $1,850.12 ($4,000.00 – $2,149.88) more by getting the Child and Dependent Care Tax Credit first. After that, they should aim to contribute the maximum to a Dependent Care Flexible Spending Account.
Scenario #14:
Filing Status: Married Couple Filing Separately
Number of Children: 1
Adjusted Gross Income: $250,000
State Living In: California
Dependent Care Flexible Spending Account:
For Married Couple Filing Separately: $5,250
If you had enough eligible expenses to contribute the maximum allowed $5,250 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. But first, please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if one of the spouse’s income is at or below $142,800 for year 2021. Therefore, this couple filing separately should have the Dependent Care Flexible Spending Account under that spouse. If the Dependent Care Flexible Spending Account is under the spouse with an income greater than $142,800, then the Social Security tax incurred is no more than 6.2 percent of $142,800 which is $8,853.60. If this is the case, for the sake of simplicity, the below calculation will still just utilize 6.2% of the entire income, which slightly over-estimates the amount of income paid in Social Security taxes.
– 1.45 percent must be paid to Medicare no matter what your income is
– 0.9 percent must additionally be paid to Medicare since your income is greater than $125,000 and filing separately
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
8.55 percent Social Security and Medicare tax
35 percent federal income tax
+ 9.30 percent state income tax
52.85 percent total taxes saved
Therefore, by contributing $5,250 into a Dependent Care Flexible Spending Account, you avoid paying 52.85 percent of taxes on that amount of money.
This saves you 52.85 percent x $5,250 = $2,774.63
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $8,000
Since your Adjusted Gross Income is $250,000, this falls between $183,000 and $400,000. Therefore, the credit rate is 20 percent.
$8,000 tax credit amount x 20 percent = a total of $1,600 of actual tax credit
Final Verdict:
The $2,774.63 in Dependent Care Flexible Account potential would be more money saved than the $1,600 in Child and Dependent Care Tax Credit.
Therefore, this married but separately filed couple would save $1,174.63 ($2,774.63 – $1,600) more by contributing the maximum to their Dependent Care Flexible Spending Account first. After that, they should aim to get the Child and Dependent Care Tax Credit.
Scenario #15:
Filing Status: Married Couple Filing Separately
Number of Children: 1
Adjusted Gross Income: $438,000
State Living In: California
Dependent Care Flexible Spending Account:
For Married Couple Filing Separately: $5,250
If you had enough eligible expenses to contribute the maximum allowed $5,250 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. But first, please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if one of the spouse’s income is at or below $142,800 for year 2021. Therefore, this couple filing separately should have the Dependent Care Flexible Spending Account under that spouse. If the Dependent Care Flexible Spending Account is under the spouse with an income greater than $142,800, then the Social Security tax incurred is no more than 6.2 percent of $142,800 which is $8,853.60. If this is the case, for the sake of simplicity, the below calculation will still just utilize 6.2% of the entire income, which slightly over-estimates the amount of income paid in Social Security taxes.
– 1.45 percent must be paid to Medicare no matter what your income is
– 0.9 percent must additionally be paid to Medicare since your income is greater than $125,000 and filing separately
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
8.55 percent Social Security and Medicare tax
37 percent federal income tax
+ 11.30 percent state income tax
56.85 percent total taxes saved
Therefore, by contributing $5,250 into a Dependent Care Flexible Spending Account, you avoid paying 56.85 percent of taxes on that amount of money.
This saves you 56.85 percent x $5,250 = $2,984.63
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $8,000
Since your Adjusted Gross Income is $438,000, the credit rate is 0 percent.
$8,000 tax credit amount x 0 percent = a total of $0 of actual tax credit
Final Verdict:
Much like Scenarios #3, #6, #9, and #12, this married but separately filed couple does not qualify for any amount of Child and Dependent Care Tax Credit. However, they do save $2,984.63 when contributing the maximum allowed to their Dependent Care Flexible Spending Account.
Therefore, they should make all contributions towards the Dependent Care Flexible Spending Account and anticipate not getting any Child and Dependent Care Tax Credit.
CALCULATIONS FOR A MARRIED COUPLE FILING SEPARATELY WITH TWO OR MORE CHILDREN:
Scenario #16:
Filing Status: Married Couple Filing Separately
Number of Children: 2
Adjusted Gross Income: $125,000
State Living In: California
Dependent Care Flexible Spending Account:
For Married Couple Filing Separately: $5,250
If you had enough eligible expenses to contribute the maximum allowed $5,250 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. Please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if income is at or below $142,800 for year 2021
– 1.45 percent must be paid to Medicare no matter what your income is
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
7.65 percent Social Security and Medicare tax
24 percent federal income tax
+ 9.30 percent state income tax
40.95 percent total taxes saved
Therefore, by contributing $5,250 into a Dependent Care Flexible Spending Account, you avoid paying 40.95 percent of taxes on that amount of money.
This saves you 40.95 percent x $5,250 = $2,149.88
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $8,000
Since your Adjusted Gross Income is $125,000, the credit rate is 50 percent.
$16,000 tax credit amount x 50 percent = a total of $8,000 of actual tax credit
Final Verdict:
The $2,149.75 in Dependent Care Flexible Account potential would be less money saved than the $8,000 in Child and Dependent Care Tax Credit.
Therefore, this married but separately filed couple would save $5,850.25 ($8,000.00 – $2,149.88) more by getting the Child and Dependent Care Tax Credit first. After that, they should aim to contribute the maximum to a Dependent Care Flexible Spending Account.
Scenario #17:
Filing Status: Married Couple Filing Separately
Number of Children: 2
Adjusted Gross Income: $250,000
State Living In: California
Dependent Care Flexible Spending Account:
For Married Couple Filing Separately: $5,250
If you had enough eligible expenses to contribute the maximum allowed $5,250 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. But first, please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if one of the spouse’s income is at or below $142,800 for year 2021. Therefore, this couple filing separately should have the Dependent Care Flexible Spending Account under that spouse. If the Dependent Care Flexible Spending Account is under the spouse with an income greater than $142,800, then the Social Security tax incurred is no more than 6.2 percent of $142,800 which is $8,853.60. If this is the case, for the sake of simplicity, the below calculation will still just utilize 6.2% of the entire income, which slightly over-estimates the amount of income paid in Social Security taxes.
– 1.45 percent must be paid to Medicare no matter what your income is
– 0.9 percent must additionally be paid to Medicare since your income is greater than $125,000 and filing separately
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
8.55 percent Social Security and Medicare tax
35 percent federal income tax
+ 9.30 percent state taxes
52.85 percent total taxes saved
Therefore, by contributing $5,250 into a Dependent Care Flexible Spending Account, you avoid paying 52.85 percent of taxes on that amount of money.
This saves you 52.85 percent x $5,250 = $2,774.63
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $16,000
Since your Adjusted Gross Income is $250,000, this falls between $183,000 and $400,000. Therefore, the credit rate is 20 percent.
$16,000 tax credit amount x 20 percent = a total of $3,200 of actual tax credit
Final Verdict:
The $2,774.63 in Dependent Care Flexible Account potential would be less money saved than the $3,200 in Child and Dependent Care Tax Credit.
Therefore, this married but separately filed couple would save $425.37 ($3,200.00 – $2,774.63) more by getting the Child and Dependent Care Tax Credit first. After that, they should aim to contribute the maximum to a Dependent Care Flexible Spending Account.
Scenario #18:
Filing Status: Married Couple Filing Separately
Number of Children: 2
Adjusted Gross Income: $438,000
State Living In: California
Dependent Care Flexible Spending Account:
For Married Couple Filing Separately: $5,250
If you had enough eligible expenses to contribute the maximum allowed $5,250 into a Dependent Care Flexible Spending Account, then that money would avoid the total percent of taxes calculated below. But first, please note the following information regarding this calculation:
1.) Social Security and Medicare:
– 6.2 percent is due if one of the spouse’s income is at or below $142,800 for year 2021. Therefore, this couple filing separately should have the Dependent Care Flexible Spending Account under that spouse. If the Dependent Care Flexible Spending Account is under the spouse with an income greater than $142,800, then the Social Security tax incurred is no more than 6.2 percent of $142,800 which is $8,853.60. If this is the case, for the sake of simplicity, the below calculation will still just utilize 6.2% of the entire income, which slightly over-estimates the amount of income paid in Social Security taxes.
– 1.45 percent must be paid to Medicare no matter what your income is
– 0.9 percent must additionally be paid to Medicare since your income is greater than $125,000 and filing separately
2.) Federal income tax: Based on 2021 federal income tax brackets
3.) State income tax: Based on California state income taxes – if you live in a different state please use your state’s tax information instead
8.55 percent Social Security and Medicare tax
37 percent federal income tax (Note: Based on 2021 federal income tax brackets)
+ 11.30 percent state taxes = (Note: Used CA’s state tax rate)
56.85 percent total taxes saved
Therefore, by contributing $5,250 into a Dependent Care Flexible Spending Account, you avoid paying 56.85 percent of taxes on that amount of money.
This saves you 56.85 percent x $5,250 = $2,984.63
Child and Dependent Care Tax Credit:
Maximum Available Child and Dependent Care Tax Credit Value for two or more qualifying individuals: $16,000
Since your Adjusted Gross Income is $438,000, the credit rate is 0 percent.
$16,000 tax credit amount x 0 percent = a total of $0 of actual tax credit
Final Verdict:
Much like Scenarios #3, #6, #9, #12, and #15, this married but separately filed couple does not qualify for any amount of Child and Dependent Care Tax Credit. However, they do save $2,984.63 when contributing the maximum allowed to their Dependent Care Flexible Spending Account.
Therefore, they should make all contributions towards the Dependent Care Flexible Spending Account and anticipate not getting any Child and Dependent Care Tax Credit.
SO WHICH IS BETTER TO USE?
Just like every answer given to us back in physical therapy graduate school days, it depends. There are some general trends we can follow, though.
The Child and Dependent Care Tax Credit was more often better for the lowest Adjusted Gross Income. When it wasn’t, the Dependent Care Flexible Spending Account was only better than the Child and Dependent Care Tax Credit by a small margin.
On the other hand, the Dependent Care Flexible Spending Account was always the better option for the highest Adjusted Gross Income. That’s because no Child and Dependent Care Tax Credit was available at that income level.
When income level fell in between these lower and higher income groups, the Dependent Care Flexible Spending Account was more often the favorable option.
However, don’t just make assumptions based on these findings. Outcomes can be different depending on different scenarios. That’s why I added in the “Pearl of PR Wisdom” scenario where there was no state income tax. This made the previous result of the Dependent Care Flexible Spending Account being the more favorable option change to the Child and Dependent Care Tax Credit becoming the more favorable option.
For the sake of brevity, another option that was not fully explored in this article is the addition of the 0.9% Medicare tax if
1. You file single and your income is greater than $200,000 per year
2. You file married and jointly if your income is greater than $250,000
3. You file married and separately if your income is greater than $125,000
This additional tax was used in some of the higher Adjusted Gross Income circumstances. However, some examples used income levels that came right up to the point where if $1 more was included then the extra 0.9% Medicare tax would have been added on. Scenario #2 is a good example of this. Avoiding this extra tax was not intentional – these calculations are just examples for learning purposes.
Finally, if your employer doesn’t provide you with the option of having a Dependent Care Flexible Spending Account, then you can always take the Child and Dependent Care Tax Credit
FINAL THOUGHTS. . .
I hope you found this article helpful. The goal was to provide you with reference examples when deciding if the Dependent Care Flexible Spending Account or the Child and Dependent Care Tax Credit should be prioritized for you.Do you have any additional information to share? Any questions on aspects that may not have been covered? Before moving on, please help make the Money Mobilizer a supportive and welcoming community for our current and soon-to-be physical therapy colleagues by leaving a question or sharing your knowledge below!
