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Posted by Tobi on March 18, 2007, 2:18 am
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I have been participating in my company's FSA for daycare
expenses. I allocated $5000 for 2006 and used all of it. Now
that I am preparing taxes I notice that I have to add these
$5000 on line 7 of 1040A and therefore increase my total
income by that amount and therefore also my taxes.
What is the point then of FSA money if you have to pay taxes
anyways? state savings? social security saving?
I noticed that if I would have not done a FSA I would be
able to claim a $3000 x 0.20 = $600 tax credit.
Am I missing something about the FSA?
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Posted by Frederick Lorca on March 19, 2007, 2:04 am
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> I have been participating in my company's FSA for daycare
> expenses. I allocated $5000 for 2006 and used all of it. Now
> that I am preparing taxes I notice that I have to add these
> $5000 on line 7 of 1040A and therefore increase my total
> income by that amount and therefore also my taxes.
>
> What is the point then of FSA money if you have to pay taxes
> anyways? state savings? social security saving?
>
> I noticed that if I would have not done a FSA I would be
> able to claim a $3000 x 0.20 = $600 tax credit.
>
> Am I missing something about the FSA?
You need to file Form 1040 and complete Part III of Form
2441. If the entire $5,000 was applied to qualified
expenses, none of the FSA money gets added back into your
income.
Assuming you are in a 25% marginal income tax bracket and
that your salary is under the annual FICA ceiling, you
netted tax savings of $1,824 by using the FSA instead of the
child care credit. That's because the $5,000 was excluded
from both income and FICA taxes, on which the combined tax
rate is 32.65% (25% income tax + 7.65% FICA tax). You
would had to have earned $7,424 ($5,000 / .6735) after-tax
in order to have been left with the $5,000 paid for child
care expenses. That leaves a difference of $2,424.
Subtract out the $600 child care credit you would have
claimed had the expenses been paid from after-tax salary,
and you're left with a net tax saving of $1,824.
Frederick Lorca
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Herb Smith on March 19, 2007, 2:04 am
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> I have been participating in my company's FSA for daycare
> expenses. I allocated $5000 for 2006 and used all of it. Now
> that I am preparing taxes I notice that I have to add these
> $5000 on line 7 of 1040A and therefore increase my total
> income by that amount and therefore also my taxes.
I believe you are incorrectly reading the instructions for
Line 7. The FSA amounts ARE NOT included in Box 1 of your
W-2, therefore are not taxable income. The only time you
would add these amounts back to income is if you DID NOT
expend the funds for daycare.
> What is the point then of FSA money if you have to pay taxes
> anyways? state savings? social security saving?
>
> I noticed that if I would have not done a FSA I would be
> able to claim a $3000 x 0.20 =3D $600 tax credit.
Assuming your qualified daycare expenses are equal to, or
exceed, $5000, the FSA is equivalent to a tax credit of
$1250. That assumes a marginal tax rate of 25%.
> Am I missing something about the FSA?
Did you perform the calculations on the back of form 2441?
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Don Priebe on March 19, 2007, 2:04 am
Please log in for more thread options > I have been participating in my company's FSA for daycare
> expenses. I allocated $5000 for 2006 and used all of it. Now
> that I am preparing taxes I notice that I have to add these
> $5000 on line 7 of 1040A and therefore increase my total
> income by that amount and therefore also my taxes.
The $5000 doesn't end up on line 7. Schedule 2 (form 2441
for 1040 filers) documents that you spent it on child care.
--
Don EA in Upstate NY
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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Posted by Bill Brown on March 19, 2007, 2:04 am
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> I have been participating in my company's FSA for daycare
> expenses. I allocated $5000 for 2006 and used all of it. Now
> that I am preparing taxes I notice that I have to add these
> $5000 on line 7 of 1040A and therefore increase my total
> income by that amount and therefore also my taxes.
You only the portion of the $5,000 that exceeds your child
care costs.
> What is the point then of FSA money if you have to pay taxes
> anyways? state savings? social security saving?
>
> I noticed that if I would have not done a FSA I would be
> able to claim a $3000 x 0.20 = $600 tax credit.
You should consider which is better, a $600 tax credit or a
$5,000 tax deduction. If you are in the 15% or higher tax
bracket, the deduction is better since it would save you at
least $750 in taxes.
> Am I missing something about the FSA?
Yes.
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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