Informational purposes only
The following content has been prepared for informational purposes only, and shouldn't be relied on for tax, legal, or accounting advice. Consult a tax professional for your own reporting purposes.
If you have dependents, you may have heard of the Dependent Care Tax Credit (DCTC), a federal tax credit worth up to 35% of your work-related dependent care expenses.
How they coexist
You can take advantage of a DC-FSA and the DCTC in the same tax year, but you can't claim the same dollar of expense under both. For any given expense, you'll choose one:
Pay for it with DC-FSA funds, or
Claim it under the DCTC
How your DC-FSA affects your credit
If you exclude DC-FSA contributions from your income, that amount reduces the dollar limit you can use for the DCTC. In other words, the more you put into your DC-FSA, the less room you have left to also claim the tax credit.
Source: IRS Publication 503, Child and Dependent Care Expenses
Factors that affect your decision
Your income, tax bracket, and total dependent care expenses all affect which option saves you more. Consult a tax professional to work through the numbers for your specific situation.