What is the advantage in participating employer sponsered flexible spending dependent care account program?

My employer is offering to particpate in flexible spending dependent care accout, inwhich payroll dedution will be done on pre tax basis for child care expenses. On the other hand, if I elect not to particapte in that program, I can still get tax benefit for dependent care expenses while filing income tax return (1040), right?

If so, getting tax benefit without participating employer program is possible. Then, What is the advantage in participating employer sponsered flexible dependent care program?

The advantages of the dependent care benefits through your employer are:

1. You can exclude up to $5,000 of your wages to be used for qualified dependent care (both you and your spouse have to work if you are married).

2. If you are in a tax bracket of 25% for example, this reduction saves you $1,250 in taxes. The higher the tax bracket, the more beneficial the exclusion becomes.

3. By reducing your AGI you may be eligible for other credits and deductions, such as student loan interest, IRA deductibility, etc.

This does not mean the DCB is always better than paying dependent care after-tax and taking the credit. If you are in a low tax bracket, the exclusion doesn't do you much good, and you may qualify for a higher credit, which is based on income. However, if you make so little income that you owe no taxes, the credit doesn't do you any good at all.

So, you need to figure the benefit both ways before you decide.

Also look at your state tax situation. Some states have a dependent care credit, sometimes a refundable one.

The advantage of a flexible spending (125) account is that you are using tax free dollars to pay for child care expenses, and medical reimbursement including premiums.

Make certain you calculate carefully in that the Company gets to keep all the funds you do not spend.

all other things being equal they will withhold less taxes now from your paycheck rather than waiting for once a year refund

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