YOUR EMPLOYER CHILD CARE CONTRIBUTION AND HOW IT IS TAXED
Congress has legislated certain tax credits and savings incentives focused on relieving the cost of child care for eligible taxpayers that may provide additional savings for you.
The Child and Dependent Care Tax Credit is a federal tax credit available for eligible taxpayers to assist in reducing your year-end tax liability.
- You may be offered both a Dependent Care FSA (DC FSA) AND an employer-sponsored funded child care (FCC) program by your company. The DC FSA funds are taken out of your wages pre-tax. The FCC funds are 100% employer funded.
- The max amount that is tax exempt in ALL combined child care benefits is $5,000 for single or married filing jointly. This amount is reduced to $2,500 for married filing separate.
- If your spouse also participates in a Dependent Care FSA or has another employer-sponsored child care benefit, that amount will be added to yours for the $5,000 maximum limit. Anything over that total is taxable.
WHAT ARE THE TAX DEDUCTION LIMITS?
An employee can only claim $5,000 TOTAL a year as tax-exempt per household. This total is for Dependent Care FSA AND employer contributions combined. For example, if you as an employee contribute $3,000 into a DC FSA, any employer contribution to child care over $2,000 will be taxed as ordinary income. The traditional FSA contributions (for medical) are separate from the DC FSA. For 2023, the maximum amount for Healthcare FSA’s is $3,050. Visit www.fsafeds.com for more information.
These tax credits and FSA changes will impact every family differently. As we are not tax professionals, we cannot advise you on the specific impact to your family. It’s best to consult with a tax professional or preparer (tax preparation software will also have information). Or visit irs.gov to learn more.