Your Money, Your Independence
Glenn Brown
Mo’ stimmy, mo’ complexity.
It’s like the more stimulus we come across, the more complexities we see.
The Good. The American Rescue Plan Act (ARPA), signed into law on March 11, raises pretax contribution limits for dependent care flexible spending accounts (DC-FSAs). New DC-FSA annual limits for pretax contributions increases to $10,500 (up from $5,000) for single taxpayers and married couples filing jointly, and to $5,250 (up from $2,500) for married individuals filing separately. This is only calendar year 2021, for now.
Money put into a DC-FSA not only reduces taxable income but it also avoids the 7.65% tax of Social Security and Medicare.
For example, if in a 24% federal tax bracket + 5% state tax + 7.65% = 36.65% DC-FSA Contribution Tax Savings Rate. Thus, the new $10,500 maximum for 2021 is $3,848 tax savings in this scenario. In a 32% federal bracket, make it $4,688 (44.65% x $10,500) in tax savings.
So just go to your HR benefits and raise your DC-FSA amounts?
If it were only that simple, as Congress loves complexity.
The Bad. APRA doesn’t require employers to offer the new DC-FSA annual limits. Those that are, many offer a one-time, midyear change. If you’re not proactive or paying attention to HR communications, you will miss out.
If miss out on DC-FSA, fear not as the ARPA also increased the child & dependent care (C&DC) tax credit for 2021, which is positive but...
The Ugly. The C&DC credit is fully refundable, and maximum credit percentage increases to 50% (from 35%). This phases down to 20% with AGIs between $125,000 and $400,000, and further phases down 1% for each $2,000 over an AGI exceeding $400,000. The amount of expenses eligible for the credit increases to $8,000 (from $3,000) for one qualifying child and $16,000 (from $6,000) for two or more qualifying children, thus maximum credits are $4,000 and $8,000.
Got that?
Furthermore, you can’t “double-dip”. Meaning contributions to DC-FSA to cover qualified expenses can’t be used for C&DC tax credit, but you can create a combination to maximize tax savings.
Questions To Ask. If better to put money into a DC-FSA or take C&DC tax credit or a combination, consider:
• Able to participate in DC-FSA?
• What is your AGI?
• How many qualifying children?
• Expected qualified dependent care expenses (i.e. daycare, after-school, summer camp)?
Yes, summer camps count, even for your 12 year old’s soccer camp.
Tax laws and regulatory changes remain constant, connect with your Certified Financial Planner to see how to maximize tax savings to your situation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.
It’s like the more stimulus we come across, the more complexities we see.
The Good. The American Rescue Plan Act (ARPA), signed into law on March 11, raises pretax contribution limits for dependent care flexible spending accounts (DC-FSAs). New DC-FSA annual limits for pretax contributions increases to $10,500 (up from $5,000) for single taxpayers and married couples filing jointly, and to $5,250 (up from $2,500) for married individuals filing separately. This is only calendar year 2021, for now.
Money put into a DC-FSA not only reduces taxable income but it also avoids the 7.65% tax of Social Security and Medicare.
For example, if in a 24% federal tax bracket + 5% state tax + 7.65% = 36.65% DC-FSA Contribution Tax Savings Rate. Thus, the new $10,500 maximum for 2021 is $3,848 tax savings in this scenario. In a 32% federal bracket, make it $4,688 (44.65% x $10,500) in tax savings.
So just go to your HR benefits and raise your DC-FSA amounts?
If it were only that simple, as Congress loves complexity.
The Bad. APRA doesn’t require employers to offer the new DC-FSA annual limits. Those that are, many offer a one-time, midyear change. If you’re not proactive or paying attention to HR communications, you will miss out.
If miss out on DC-FSA, fear not as the ARPA also increased the child & dependent care (C&DC) tax credit for 2021, which is positive but...
The Ugly. The C&DC credit is fully refundable, and maximum credit percentage increases to 50% (from 35%). This phases down to 20% with AGIs between $125,000 and $400,000, and further phases down 1% for each $2,000 over an AGI exceeding $400,000. The amount of expenses eligible for the credit increases to $8,000 (from $3,000) for one qualifying child and $16,000 (from $6,000) for two or more qualifying children, thus maximum credits are $4,000 and $8,000.
Got that?
Furthermore, you can’t “double-dip”. Meaning contributions to DC-FSA to cover qualified expenses can’t be used for C&DC tax credit, but you can create a combination to maximize tax savings.
Questions To Ask. If better to put money into a DC-FSA or take C&DC tax credit or a combination, consider:
• Able to participate in DC-FSA?
• What is your AGI?
• How many qualifying children?
• Expected qualified dependent care expenses (i.e. daycare, after-school, summer camp)?
Yes, summer camps count, even for your 12 year old’s soccer camp.
Tax laws and regulatory changes remain constant, connect with your Certified Financial Planner to see how to maximize tax savings to your situation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.
