No Brainer – FSA Dependent

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by on June 18, 2010 at 1:21 am

Easy tax money

If deciding between the dependent care credit and using the FSA is keeping you up at night – I’ve got great news for you!!! It’s bedtime. 99.999% of the time it makes way more sense to use the FSA account.

What is a Dependent FSA?

The Dependent FSA is similar to the medical FSA in that you are allowed to circumvent Federal, State, and payroll (social security and medicare) taxes. You can allocate $5,000 into your FSA. One dependent will generally produce effective tax savings in the range of $1,000-$1,400. There aren’t any pesky phase out limitations to worry about as well.

VS Dependent Care Credit

The dependent care credit allows for a credit offset of $600 per child (with limitations). Cash credits are generally king. But in this instance we’re able to circumvent several taxes while lowering our AGI (these deductions are usually after AGI is calculated “known as from AGI”).

What are the drawbacks?

This is essentially a no brainer as far as tax maneuvers go. The biggest drawback is that you have to offset dependent care eligibility with the FSA offset. Still, 99.999% of the time it’s better.

Advantages?

Besides the obvious tax savings you’re lowering your AGI. This can reduce the impact if you’re in one of those pesky phase out positions where you are losing child or other tax credits. It can also effect AMT phase outs and exemption allocations.

Unfortunately…

Well I have to add this in… Even though we almost always effectively save more, there’s an issue. We as taxpayers tend to base our savings on our refund. Problem being that payroll will lower your withholding when you contribute to your FSA. Meaning your refund will most likely not be better (it actually might be less)….

FSA factors for Mariners to consider

First – there are unfortunately very few maritime employers who have implemented flexible spending accounts. And if they’re not available, there’s no option.

Second – Multiple States… Say you live in New Hampshire. You sail foreign. Your spouse works in Massachusetts. Both employers offer FSA’s. Who Pays in? THE SPOUSE DOES… Not because we’re mean. Simply because your spouse has to file a non-resident return in Massachusetts every year. Meaning they’ll be able to offset that pesky State tax where you will not.

Third – State Employees… Flashback – (My dad had a sign that said “A Taxpayer is someone who doesn’t have to pass a civil service exam to work for the government….”) Joking aside, many State employees aren’t required to pay into Social Security and Medicare. Meaning if one spouse does, you’re losing a 7.5% offset. Always determine what Federal and State retirement systems you are paying into.

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