E3only

Hi guys,

I have a quick question
-I work full time
-My wife has EAD and has her own internet based business

We have a 10 month old and looking to put him in day care for 2 days a week just to get him mingle with other kids.

The question is - Can I do that? Is there a restriction that my wife HAS to work for me to claim this benefit? She does not work for anyone but is self employeed.

Thanks much and Happy thanks giving!!

Bink

See here: http://www.irs.gov/uac/Ten-Things-to...nt-Care-Credit and here http://www.irs.gov/pub/irs-pdf/p503.pdf

It's a little vague but I think if you can show that she has self employment income then that's fine and you can claim it.

Just read your description again - No she doesn't have to work for you, she can be self employeed.

E3only

Thanks, I need some more help.

From http://www.irs.gov/pub/irs-pdf/p503.pdf page 10

"Self-employment earnings. If you are self-employed,
include your net earnings in earned income. For purposes
of the child and dependent care credit, net earnings from
self-employment generally means the amount from
Schedule SE (either Section A or Section B), line 3, minus
any deduction for self-employment tax on Form 1040 or
Form 1040NR, line 27. Include your self-employment
earnings in earned income, even if they are less than
$400 and you did not file Schedule SE"

Am I right in saying (in the context of the full PDF document) that I can only claim FSA lower of my income and her income. Furhter her income (She is self employed) is her net income from her business (NOT sales but net profit)....?

Michael

Yes, a "dependent care FSA" is limited to $5,000 but will be reduced if the lowest income earner has an income less than $5,000. Since she is self employed, her income is calculated after expenses.

If her income is going to be below $5,000, it may be better taking the "dependent care tax credit" instead of trying to figure out how much to contribute to a FSA since it is "use-it-or-lose-it" and if you can't use it because of her low income or low child care expenses, you lose it.

The tax advantages of using a FSA over the "dependent care tax credit" is not as straight forward as it may seem. For example, if you make $146,000 combined income after deductions and exemptions, your highest federal marginal tax bracket is 25% and California state marginal tax bracket is 9.3% for a total of 34.3% at the highest marginal bracket. Using the $5,000 FSA deduction, the tax savings is $1,715 so any "dependent care tax credit" above that amount will likely be more beneficial (also have to calculate possible AMT to get exact figure). Also at lower incomes, California may also allow for a "dependent care tax credit".

E3only

Thanks appreciate that.

Can you point me in the right direction on the differences between FSA and dependent care tax credit?

From what I understand - FSA is from my pay check and has use or lose.
Does the dependent care tax credit come into play when I am doing taxes?

Are you saying that instead of doing the FSA, I rather claim taxe deductions?

Example of your situation could be
150 combied income but 9K 401K, 5K health care premium and may be 15K for mortgage interest and 1K other deductions....like donations.

Michael

The "dependent care tax credit" is claimed when you file your tax return. It is a tax credit instead of a deduction and is described at the beginning of the PDF that you referenced. The credit is between 20%-35% of your child care expenses depending on income.

Since your AGI is likely above $43,000, the tax credit will be 20% of your child care expenses to a $3,000 maximum tax credit for one child. Form 2441 is the form to file. I believe most tax preparation programs prompt for the dependent care tax credit. If you have last years tax preparation program on your computer, play with it to see what it asks. In Turbo Tax it is under "Deductions & Credits" in the "Child and Dependent Care" section. Turbo Tax also has help that describes that both you and your spouse must have income as well as other criteria.

http://www.irs.gov/pub/irs-pdf/f2441.pdf

California allows a dependent care tax credit to $100,000 AGI and no tax credit above that amount as described in the following link.

http://www.taxcreditsforworkingfamil...te/california/

Also when I stated that your tax savings for a FSA deduction is 34.3%, that is not 100% correct since state taxes are deducted from federal income. Therefore your total savings is less than $1715 but instead $1555 or a 31.1% tax saving. For example, if you take a $5,000 dependent care FSA deduction, it reduces your state tax deduction from federal income by $465 at a 9.3% state tax rate and that $465 state tax saving is taxed at 25% on the federal level. In states with no income tax, the tax savings would be 25% for a FSA deduction at $146,000 AGI.