DEPENDENT CARE

Click Here To Calculate Your Tax Savings

DEPENDENT CARE SPENDING ACCOUNTS OR THE FEDERAL TAX CREDIT . . . WHICH IS BETTER FOR YOU!

Federal tax laws allow you to reduce your taxes if you pay someone to care for your child or other dependent so that you may work. You may reduce your taxes by (1) participating in a Dependent Care Flexible Spending Account through your employer's flexible benefits plan, (2) using the Federal Dependent Care Tax Credit, or (3) using a combination of both methods. The amount you save on taxes will vary depending on the method you use, your salary, your expenses, and your tax status. Different tax-saving methods may affect your cash flow, financial flexibility, and federal income tax return preparation. The information below can help you determine which method is best for you.

Dependent Care Spending Account and the Federal Tax Credit - How They Are Alike

There are similarities in the Dependent Care Spending Account and the Federal Tax Credit since both are regulated by the Internal Revenue Service (IRS). To use either the Spending Account or the Federal Tax Credit -

• You must pay child/dependent care expenses so you (and your spouse if you are married) can work, look for work, or attend school full-time;
• Your child must be age 12 or younger, must live in your home and must be claimed as a dependent on your federal income tax return. Your dependent may also qualify if he or she requires full-time care because of a physical or mental disability and is incapable of self-care (for example, a disabled child regardless of age or a disabled parent);
• You must pay someone to care for your child or dependent in your home, in someone else's home, at a licensed day care center or nursery, at a day camp, or at another location. Overnight camp, educational expenses, and nursing homes do not qualify as eligible expenses.

Dependent Care Spending Account and the Federal Tax Credit - How They Differ

There are also important differences in the Dependent Care Spending Account and the Federal Tax Credit -

• The Dependent Care Spending Account applies to eligible expenses of up to $5,000 of care each plan year provided to one or more of your dependents. Eligible expenses under the Federal Tax Credit are limited to $3,000 per calendar year if your expenses are for one qualifying dependent or $6,000 if your expenses are for two or more qualifying dependents;
• If you use a Dependent Care Spending Account, your tax savings will equal your combined Federal Income Tax, State Income Tax, and Social Security tax rate. The Federal Tax Credit allows you to claim an income tax credit from as high as 35% to as low as 20% of your total dependent care expenses. (The rate of the credit is reduced by 1% for each $2,000 of your adjusted gross income over $15,000. See table below)

FEDERAL TAX CREDIT TABLE

Additional Information Concerning Dependent Care Spending Accounts

• You may be able to utilize both the Dependent Care Spending Account and the Federal Tax Credit. For example, if you have two or more qualifying dependents for whom you pay more than $5,000 in work-related dependent care expenses, you may contribute the maximum $5,000 to a Dependent Care Spending Account and use the Federal Tax Credit for the remaining $1,000 of expenses. It is important to remember that contributions to your Dependent Care Spending Account will reduce, dollar for dollar, the expenses eligible for calculating the Federal Tax Credit.
• Your dependent care expenses must enable you (and your spouse, if married) to be gainfully employed. The maximum annual contribution you may make to a Dependent Care Spending Account is $5,000 or the lowest of the following -
  
  
  • Your earned income for the year (if less than $5,000);
  • Your spouse's earned income for the year (if less than $5,000);
  • $2,500 if you and your spouse file separate federal tax returns.
  
  A spouse who is a full-time student at least five months during the year is deemed to earn $200 per month if the employee has one dependent in day care or $400 per month if the employee has two or more dependents in day care. Volunteer work is not considered gainful employment.
• Child of Divorced or Separated Parents - To be a qualifying person, your child usually must be your dependent for whom you can claim an exemption. But an exception may apply if you are divorced or separated. Under the exception, if you are the custodial parent, you can treat your child as a qualifying person for dependent care even if you cannot claim the child's exemption. If you are the noncustodial parent, you cannot treat your child as a qualifying person even if you claim the child's exemption on your federal income tax return.
• Payments to Relatives - You can use a Dependent Care Spending Account even if you pay a relative to care for your child or children provided the relative is not another dependent of yours. This rule applies to the Federal Tax Credit as well.

More information concerning Dependent Care Spending Accounts and the Federal Tax Credit may be found in IRS Publication 503, "Child and Dependent Care Expenses". A copy of Publication 503 may be found on EBS/Atlanta's Web site at www.ebsatlanta.com/forms.html or by contacting your local IRS district office. You may also request that a copy be mailed to you by calling EBS/Atlanta, toll-free, at 1-800-647-3709 (if calling from within metro-Atlanta, please dial 770-569-0080).

This information is intended to provide a general overview of Dependent Care Spending Accounts and the Federal Tax Credit and does not purport to be complete. Additional information regarding your employer's flexible benefits program is available including a summary plan description. A plan document is also on file with your employer. Neither your employer nor EBS/Atlanta can give you personal tax or accounting advice. You should always consult with your personal tax advisor for assistance.