With the costs of childcare constantly rising, many people wonder if there are any tax savings available to help with the burden. There are two options to consider.
Section 125 Plan (“Cafeteria Plan”)
If your employer has a written Section 125 plan in place, they can offer dependent care assistance through this plan. This allows you to put aside up to $5,000 ($2,500 for married employees filing separate returns) before taxes to pay for dependent care expenses. The amount is deducted from your paycheck and then reimbursed to you for qualified expenses – money you paid for services that enable you to work. Because this is a pre-tax deduction, you won’t have to pay federal, social security, Medicare, or state taxes on the amount. Thus, the cafeteria plan with dependent care assistance is an excellent way of saving tax dollars on expenses that the parent accumulates already.
Child and Dependent Care Credit
If you do not have a dependent care assistance program, or your child care expenses exceed the $5,000 limit, you may be able to save with the Child and Dependent Care tax credit. Qualifying childcare expenses are capped at $3,000 for one qualifying child or $6,000 for two or more qualifying children. If you took advantage of the $5,000 pre-tax plan, you need to have expenses over and above that in order to qualify for the credit. The credit on your tax return can be anywhere from 20-35% of those qualified expenses.
Generally, the more you earn, the more you’ll benefit from the cafeteria plan. And while neither of these options will completely lift the financial burden of childcare, it is important to know that there are options to help save some money.
Written by Katherine Aultz