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Tax Savings - FSA Versus Dependent Care Credit

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Eileen files as head of household and earns a salary of $75,000. She has a 4 yr old dependent daughter for whom she pays $5000 in annual day care expenses so that she can go to work. Her employer offers a dependent care flexible spending arrangement (FSA) in which she could contribute up to $5000 on a pretax (before FICA and income tax) basis. If she does not participate in the FSA, Eileen can claim the dependent child care credit for these expenses. Eileen has no other income or deductions. Compute the tax savings of these two alternatives and make a recommendation to Eileen.

Please use Excel.

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Solution Preview

Please see the attached Excel 97-2003 spreadsheet for format and formulas.

Taking the Credit
Gross salary $75,000
Standard deduction (8,500)
Personal exemption ...

Solution Summary

This solution illustrates how to compute the tax advantage of using a flexible spending account over taking a dependent care credit.

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