From the crazy high costs of childcare to the staggering price of college tuition, parents just don’t get a break—except during tax season. Today I’ll walk you through some specific tax breaks for dependent care and education.
Dependent Care Flexible Spending Account
One way to save throughout the year is to set up a Dependent Care Flexible Spending Account, or DCFSA. To do this, sign up during open enrollment through work. If you’re a working parent with kids under the age of 13, money is deducted from your paycheck and set aside in a special account for you to use to pay for childcare. Doing this can save you about 30% in taxes on the money you put toward the DCFSA. In my family, we put the maximum amount we’re allowed, $5,000 per household, and it saves us about $1,500 a year.
Child and Dependent Care Credit
If you didn’t sign up for a DCFSA, look into the Child and Dependent Care Credit when filing your taxes. To be eligible, both parents have to be working or looking for work and have dependents aged 13 or under. This credit can give you back anywhere from 20% to 35% of your childcare expenses, depending on your household income. But the maximum you can claim in expenses for one child is $3,000, and $6,000 for two or more. As an example, even if I spent more than $10,000 for my son’s daycare, I would only be able to claim $3,000 in expenses. Since I’m qualified to receive a 20% refund based on our household income, I would get a credit for $600. And remember, you need to list the caregiver or daycare center with an employment ID number or a Social Security number when you file.
Keep in mind that in many cases, the dependent care FSA can yield more savings than the credit. “Contributing to an FSA generally results in a higher tax savings than claiming the Child and Dependent Care Credit on your tax return,” says Barry S. Kleiman, CPA and principal at Untracht Early. “Furthermore, the benefit of the FSA continues to outweigh the credit as you move into the higher tax brackets,” Kleiman adds.
But some families may be able to utilize both the FSA and the dependent care credit. If you have two or more children and your expenses exceed $10,000, you can set aside the typical maximum of $5,000 in your FSA and then claim the dependent care credit for up to $1,000 in additional expenses.
Deductions for 529 savings plans
Many states offer full or partial tax deductions for parents saving for college in state-sponsored 529 plans. But different states have different rules, so check to see if your state allows for deductions on money saved for college last year. For instance, New Jersey doesn’t offer state deductions for 529s, but New Yorkers who are married and filing jointly can deduct up to $10,000 for 529s.