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Understanding Dependent Care/Child Tax Credits During Open Enrollment Season


Content provided for general information. Talk to your advisor to learn about recent updates or other rules that may apply to your situation.

Open enrollment season is a time when employees can make changes to their benefits plans, such as enrolling in health insurance or increasing their contributions to a retirement account. It's also the time when many parents start thinking about their childcare expenses and how they can save on taxes. One of the options available for this is a Dependent Care Flexible Spending Account (DCFSA). However, there are also Child Tax Credits to consider. To help clear up any confusion, let's dive into some common questions about these benefits.

1. Can You Max Out a DCFSA and Claim the Child Tax Credit?

Many parents wonder if they can contribute the maximum amount to a DCFSA, which is $5,000 per year, and still claim the Child Tax Credit, which is worth up to $2,000 per child. The answer is yes, you can do both. However, the expenses you use to claim the Child Tax Credit cannot also be reimbursed through your DCFSA. This means that if you have $5,000 in childcare expenses, you can choose to either contribute the full amount to your DCFSA and not claim the Child Tax Credit, or claim the Child Tax Credit and not contribute to the DCFSA.

It's important to note that the Child Tax Credit has income limitations, so not all families will qualify for the full amount. Consult with a tax advisor to determine your eligibility and how much you can claim.

2. What is the Maximum Income for a DCFSA?

The maximum income for a DCFSA is $135,000 per year for a single filer or for married couples filing jointly. This income limit is for the total household income, not just the income from one job. So if you have two jobs, both incomes will be considered when determining your eligibility for a DCFSA.

It's also worth noting that if you are married and file separately, the maximum income limit for a DCFSA is $67,500. Again, consult with a tax advisor to determine your eligibility and the maximum amount you can contribute.

3. Can You Contribute to a DCFSA at Both Jobs?

It is possible to contribute to a DCFSA at both of your jobs, as long as your total contributions do not exceed the annual limit of $5,000. However, keep in mind that if you are married, your spouse can also contribute up to $5,000 to their DCFSA at their job. This means that as a couple, you can contribute up to $10,000 to DCFSA accounts.

Again, it's important to consult with a tax advisor to determine the best strategy for your specific situation and to ensure you do not exceed the annual contribution limit.

4. Are DCFSAs Worth It for Childcare Expenses?

Whether or not a DCFSA is worth it for childcare expenses depends on your personal situation and financial goals. However, for many families, contributing to a DCFSA can provide significant tax savings. By using pre-tax dollars to pay for childcare expenses, you can essentially reduce your taxable income. This can result in a lower tax bill and more money in your pocket.

It's important to note that DCFSA funds must be used within the plan year, or you risk losing the money. Therefore, it's important to carefully plan your contributions and expenses to ensure you do not over-contribute and lose money.

In conclusion, open enrollment season is a great time to review your benefits and consider your options for childcare expenses. While the rules and limitations for DCFSA and Child Tax Credits may seem confusing, consulting with a tax advisor can help you make the best decisions for your family. They can also provide personalized advice based on your specific income and expenses. Don't hesitate to reach out for assistance and make the most of these valuable benefits.