The coronavirus has changed many child care plans for families — whether they needed extra care while schools were closed, had to find alternatives to summer camps that shut down or have to pay for more care while they’re working from home. No matter what changes you’ve experienced, your child care needs are probably very different than what you expected at the beginning of the year. New rules for dependent care flexible spending accounts may let you change your plans mid-year and make the most of these tax-advantaged accounts; the child care tax credit can help you fill in some gaps. It’s a good time to reassess your care plans and make the most of these tax breaks.
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New Rules for Using Tax-Free Money From a Dependent Care FSA
If your employer offers a dependent care FSA at work, that will usually give you the biggest tax break. You can set aside up to $5,000 pre-tax each year and can use the money tax-free to pay for child care costs for children under age 13 while you and your spouse work or look for work. The cost of day care, a nanny, preschool (but not kindergarten or older), before-school or after-school care and even summer day camp can count. Overnight camps don’t count.
You usually decide during the open-enrollment period in the fall how much to set aside from your paychecks for the year. If both you and your spouse have a dependent care FSA at work, the maximum you can contribute between the two of you is still $5,000. Your contributions escape income taxes and Social Security taxes. You usually have to use the money by Dec. 31 or lose it, although some plans give you a grace period until March 15 to spend the money.
The Coronavirus Aid, Relief, and Economic Security Act lets employers that already offered a grace period extend the 2019 deadline until Dec. 31, 2020, although most companies have not elected to extend the grace period, says David Speier, managing director of benefit accounts at Willis Towers Watson, an employee benefits consulting firm.
You usually can’t change your contribution amount in the middle of the year, unless you’ve experienced certain life changes, such as marriage, divorce, death or the birth or adoption of a child. You can adjust your contributions if your employment status or the cost of care changes, too. The CARES Act lets employers add a special mid-year open enrollment period when employees can start, stop, increase or decrease their contributions for other reasons.
However, employers are not required to make this change. “Because the coronavirus greatly changed both needs and access to child care services, parents may have ended up with more or less expenses than anticipated,” says Paula McMillan, a CPA financial planner in Greensboro, North Carolina. “Although we don’t know if employers are modifying their plan rules, I believe the pressure is on them to do so.”
If your care needs have changed since you made your dependent care FSA election for the year, estimate whether you’re on track to use more or less money by year-end, and find out whether you’re eligible to change your contributions to match your new needs.
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Claiming the Child Care Tax Credit
If you don’t have a dependent care FSA at work, or if you spend more on care than you contributed to the FSA, then you may be eligible for the child care tax credit. This credit can be worth 20% to 35% of up to $3,000 in child care expenses if you have one eligible child, or up to $6,000 in expenses for two or more children. The lower your income, the larger the credit. There’s no maximum income limit; if you earn more than $43,000 (whether you’re single, married or head of household) the credit can still be worth up to $600 if you have one eligible child or up to $1,200 for two or more children.
The definition of eligible expenses is the same as it is for the dependent care FSA: the cost of care for children under age 13 while you and your spouse work or look for work including day care, a nanny, preschool, before-school and after-school care and summer day camp.
To claim the credit, file f orm 2441 with your income-tax return. You’ll need to provide the care provider’s name and Social Security or tax ID number. Keep receipts and canceled checks in your tax files, says Steven Hamilton, an enrolled agent in Grayslake, Illinois.
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A Strategy to Benefit From Both Tax Breaks
You can’t double dip and claim the child care tax credit for the same expenses you pay with tax-free money from your dependent care FSA. If you have a dependent care FSA at work, that’s usually the better option because it avoids federal and state income taxes as well as Social Security taxes, says Hamilton.
But if you have two or more kids under 13 and $6,000 or more of child care expenses, then you may be able to benefit from both tax breaks. The dependent care FSA can be used for up to $5,000 in child care expenses, but the child care credit counts up to $6,000 in care costs if you have two or more kids. You can’t claim the credit for the $5,000 you pay with tax-free money from the dependent care FSA, but you can take the child care credit for the extra $1,000 in expenses if you have two or more children under 13, which can reduce your tax liability from $350 to $200 depending on your income.
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Tax Strategies for Child Care Changes During the Coronavirus Pandemic originally appeared on usnews.com
