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USA Today
7 hours ago
- Business
- USA Today
Crushed by child care costs? Trump tax law offers parents some relief
Parents with crushing child care expenses will get a little more help in 2026, from Trump's new mega tax and spending law. The new tax law permanently increases the annual pre-tax contribution limit for dependent care flexible spending accounts, or DCFSAs, to $7,500 for married, joint filers. That's up from $5,000 and is the first change since 1986, apart from a temporary pandemic-era boost in 2021. It also expanded another tax provision, the child dependent care tax credit (CDCT), making up to 50% of a maximum of $3,000 of qualifying expenses reimbursable for one child and a $6,000 maximum for two or more. That means the maximum tax credit for one child increases to $1,500 from $1,050. Both changes can be good news for parents, but they should do the math to see which is more lucrative, accountants said. If your employer offers a DCFSA, the 'pre-tax dependent care FSA usually beats the dependent care credit' because of the higher contribution limit starting next year, said Richard Pon, a certified public accountant in San Francisco. Why a dependent care FSA may beat a credit Usually, a tax credit is more valuable than a tax deduction, which is what a pre-tax contribution to a dependent care FSA would be. A tax credit is a dollar-for-dollar reduction of your tax bill, and a deduction lowers your taxable income. For example, a $1,000 tax credit cuts your tax bill by $1,000. A $1,000 tax deduction for someone in the 22% tax bracket would result in $220 in tax savings ($1,000 x 0.22 = $220). But the maximum dependent care credit, in this case, phases out quickly and only applies to federal taxes. More: Trump's sweeping law increases child care tax credits. Here's how much and who benefits. 'In contrast, your payroll tax deduction reduces federal income tax, Social Security tax, Medicare tax and state tax,' Pon said. 'And there is no payroll phase-out…Your savings depends on your tax rate but with federal, state and 7.65% FICA (or Federal Insurance Contributions Act to fund Social Security and Medicare) taxes, your tax savings really adds up.' Additionally, a payroll deduction can reduce taxes paid in each pay period, which gives you more money throughout the year, said Sara Taylor, senior director of employee spending accounts at consulting firm WTW. 'On the tax credit side, it's a credit so there's no reduction in taxes you pay,' she said. 'It's just lowering what you owe when pay taxes. The benefit is delayed, and it does not increase your refund at all.' CDCT is a non-refundable tax credit, meaning it can reduce tax liability down to zero, but no refund is given if the credit exceeds tax liability. How do tax savings compare with DCFSA vs dependent care credit? Here's how the two tax changes compare for a family with two working parents, two children, $7,000 in qualified dependent care expenses during 2026, with adjusted gross income (AGI, or gross income minus certain deductions) of $60,000 and a marginal federal income tax rate of 22%: DCFSA CDCTC Can Americans use both provisions? Americans can use both the CDCTC and DCFSA, but it could be tough due to restrictions on each. The ability to leverage these options depends heavily on individual circumstances, such as income level, filing status, state and local tax implications, and the amount of qualified dependent care expenses. Beware, there are specific items that are considered qualified expenses, and the same expenses can't be used for both options. Potential pitfalls of DCFSA Tax savings are attractive with the DCFSA, but experts also issued a few warnings. What employers can do is raise the limit for less highly compensated employees and scale it back for those who earn more, Taylor said. All of this may take time, so many employers may not have this implemented for 2026, she said. To offer this benefit, employers must amend their plans by December 31, 2025. But 'this is so good for employees that I think most employers will adopt the higher benefit,' Taylor said. "But if your employer offers this benefit, I really encourage people look at that," she said. "This is an incredibly overlooked benefit.' If not, the DCTC is available to everyone, she said. Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@ and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
Yahoo
18-02-2025
- Business
- Yahoo
What is a dependent care FSA?
A dependent care flexible spending account (DCFSA) is a tax-advantaged account that lets you build tax-free savings for adult and childcare expenses. It's a nice perk, but it requires some planning, and there are rules you need to follow. DCFSAs are part of employer benefits or cafeteria plans. If your employer offers it, you can sign up during open enrollment or a qualifying life event and choose how much to contribute from each paycheck. Your employer may give you a debit card to pay for eligible expenses, or you can pay out of pocket and submit a claim form for reimbursement. To be eligible for dependent care benefits, you have to work for an employer that offers it and meet IRS requirements for claiming dependent care expenses, including the following: The expenses must pay for caring for a child under 13 or a spouse or dependent who cannot care for themselves. You (and your spouse if filing jointly) have earned income during the year. You're paying for care so you can work or look for work. Funding your DCFSA with pre-tax money lowers your taxable income and, ultimately, your tax bill. For a married couple in the 22% federal tax bracket, tax savings from a dependent care FSA could total $1,100. You can save up to the annual contribution limit, which is $5,000 (or $2,500 if you're married and filing separately) for both 2024 and 2025. Aim to use your DCFSA funds by the end of the plan year, or you'll forfeit them to your employer. An employer can offer up to a 2 ½ month grace period where you can continue to incur and claim approved expenses. Talk with your human resources group or check your employee benefits plan for specific details. The dependent care FSA contribution limit is staying the same for 2025. How much you can save depends on your tax filing status. Single or head of household: $5,000 Married, filing jointly: $5,000 Married, filing separately: $2,500 Since you have to set your contribution amount for the year ahead of time — usually during open enrollment — you'll have to do some planning. Estimate your 2025 expenses, by looking at what you spent in previous years or adding up monthly fees for your children's preschool, for example, to determine how much you should save. Remember, you forfeit unused FSA funds at the end of the calendar year. Expenses are FSA-eligible if they are work-related, meaning they're costs you pay for the care of a qualifying dependent so you can work or look for work. Examples of dependent care FSA-approved expenses could include: Daycare, preschool, or similar programs. A babysitter, au pair, or nanny who watches your child while you work. Before- or after-school programs and summer day camps. Dependent care centers, like adult day care. Some expenses that are not FSA eligible include private school tuition, overnight camps, and music lessons or sports programs. You may be able to combine dependent care tax breaks and maximize your savings. Consider these additional savings for households with children or dependents. Child tax credit: The child tax credit is a tax break for households with kids under 13. You can claim this credit, worth up to $2,000 per child for 2024, even with a DCFSA. Child and dependent care tax credit: The child and dependent care tax credit lowers your tax bill based on what you paid for dependent care. Because the DCFSA and childcare credit cover similar expenses, you can use both as long as you don't claim the same expenses for both benefits. Households can claim up to $3,000 for one dependent or $6,000 for two or more dependents. A dependent care FSA is one of several savings accounts with tax benefits. Here are two others worth noting. Healthcare FSA: Use pre-tax money to save and pay for eligible health expenses through a healthcare savings account only available through your employer. Health savings Account (HSA): Like an FSA, you can use an HSA to save for medical expenses with pre-tax dollars, but only if you're enrolled in a high deductible health plan. You don't need an employer to open an HSA, and there is no annual deadline to use the funds. Go further: All you need to know about Health Savings Accounts Your dependent care FSA balance does not roll over. Unused funds usually expire at the end of the year unless your employer offers a grace period of up to 2 ½ months into the new year. FSA-eligible expenses are for qualifying adult or childcare that allows you to work or look for work. These programs could include elder care, babysitting, nursery school, and before- or after-school care. You can use a dependent care FSA with the child tax credit. The child tax credit gives up to $2,000 per qualifying child. You may also be able to combine your FSA with the child and dependent care credit, which is a tax break for dependent care expenses. The dependent care credit provides $3,000 for one dependent and $6,000 for two or more dependents. You can't claim expenses already reimbursed through your FSA.
