Pre-taxed child care expense

[dyne]

WHAT is the advantage of having pre-taxed child care expense? It plays havoc with
the child care credit. I just prepared a return where the taxpayer had $2,000 of pre-taxed
child care expense and he paid a total of $4825 for actual child care expense. He ended
up with a $100 child care credit. If he had NO pre-taxed child care expense, his child
care credit would have been $600. A preparer friend and I have discussed this and
both believe that the pre-taxed child care expense reimbursement provides NO tax benefit.
What am I not understanding?

[Burke]

There is a break-even point which should be calculated before a client signs up for this benefit. A person in a 28% tax bracket and up needs the reduction, not the 20% credit. As you will note, the amt of the CCTC is based on a percentage that decreases with higher AGI to a maximum of 20%. It depends on the taxpayers marginal tax bracket as to whether it is beneficial or not. You also need to factor in what your individual state may allow for this benefit as well, whether deduction or credit. If neither, you still need to factor in whether the reduction in income on the W-2 affects the state calculation.

[Burke]

One thing I forgot to mention in my previous post --- another factor to consider is that the TP is not paying social security tax on this Sect 125 benefit. So he/she is saving 7.65% there which will be lost if it is changed.

[dyne]

Pre-taxed child care expense

Thank you Burke. Any other comments?

[Lion]

Pre-tax benefits reduce AGI

As has been stated, pre-tax dependent care saves the federal tax rate on the amount and state tax rate and FICA/medicare and reduces AGI which can make more medical expenses deductable or miscellaneous/2% or put them in the range to take a deductable IRA or take advantage of the Saver's Credit or report a lower AGI for state &/or local benefits such as property tax deferral or... If your client's in the 25% federal bracket and 5% state, she saves over $1,800 in those taxes plus FICA/Medicare before even factoring in other potential savings such as increased medical deductions. That's better than the $600 credit.

[BP.]

If just one child, the value of excluding $5,000 in DCB (and any other benefits involving a reduced AGI) could be better than taking a credit on just $3,000 of expenses.

[Burke]

I think all these posts just about cover everything. As you can see, GENERALLY, it benefits higher income taxpayers to take the salary reduction. Lower income TP's might come out better with the credit. It all depends, every situation is different. And it may change from year to year. Since they have to sign up for the benefit in the previous year, and cannot change it unless there are special circumstances, it can sometimes be a tough call if they are borderline.

[DonPriebe]

And then there's the state to consider ...

I think all these posts just about cover everything.

New York State has a child care credit that's refundable.

[dyne]

pre-taxed child care expense

THANKS to all. I understand it better now. Best wishes.
dyne
Fred