If an employee has dependent care expenses, is it better to take the credit, or elect to pay the expenses through the Cafeteria Plan?
A. It depends on the adjusted gross income of the participant. The dependent care credit goes from 30% to 20% as the adjusted gross income increases from $10,000 to $30,000. If you assume that a participant pays 15% federal income tax, 5% state income tax, and 7.65% FICA tax, you would want to compare this tax savings with the potential tax credit. The point where the tax savings of 27.65% equals the tax credit of 28% is approximately $12,000 to $14,000 in adjusted gross income. Therefore, as a general rule, if a person’s adjusted gross income is greater than $14,000, they would be better off using the Cafeteria Plan to pay for dependent care expenses. If the participant’s adjusted gross income is less than $14,000, they would be better off taking the dependent care credit. These are only general rules and other factors may be involved. Q.
Related Questions
- If an employee has dependent care expenses, is it better to take the credit, or elect to pay the expenses through the Cafeteria Plan?
- Can I use the Cafeteria Plan for dependent care expenses and also the Dependent Care Credit on my federal tax return?
- Can I use the Medical Reimbursement Plan to pay for my dependent s medical expenses?
