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Posted by Bill Brown on January 13, 2007, 2:12 am
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dingodog_1...@yahoo.com wrote:
> My employer has FSA dependent care account and I decided to
> make use of it in 2006 and 2007 for child care expenses.
> Afterwards, I decided to do the math (see below) and it
> seems that I loose money from this election although the FSA
> provider's info tells me that there's no way to loose if you
> use their FSA. Based on my calculations, I would benefit
> from the FSA only if my effective tax rate is higher than
> 40%. Could you maybe tell me what's wrong with my math?
>
> 2006 2007
> Facts
> Eligible childcare expenses 3,200 9,800
> Selected FSA deduction 1,500 5,000
> Maximum FSA deduction 5,000 5,000
> Maximum childcare credit 3,000 3,000
> AGI child credit threshold % 20% 20%
>
> Assumptions
> Effective tax rate 25% 25%
>
> Calculation
> Tax Credit Savings 640=3.2k*20% 1,960 =9.8k*20%
> FSA Account Savings 375=1.5k*25% 1,250 =5k*25%
> Diff 265 710
>
> Total diff (loss) 2006 & 2007: 975
You have calculated the tax credit savings using the WRONG
amount in both years. In 2006 the tax available tax credit
after using the FSA is [(3,000 - 1,500) x .20]. Without the
FSA the credit would have been (3,000 x.20). So, the credit
went down $300 when the FSA was used but the FSA savings
were $375 so you were $75 better off.
In 2007, the FSA saved you $1,250 and the credit was ZERO.
If you had not used the FSA, the credit would have been
(3,000 x .20) or $600. Using the FSA saved you $650.
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