University of Minnesota
Office of Human Resources
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612-625-2016

Dependent Daycare Account - Tax Considerations

Dependent Daycare Flexible Spending Account vs. Tax Credit

The amount of dependent daycare tax credit depends on your income level, dependent care costs, and the number of dependents receiving daycare. The credit is 20 to 30 percent of up to $3,000 of care expenses for one dependent and up to $6,000 of care expenses for two or more dependents. You should determine if it is to your advantage to take the tax credit for dependent day care expenses or pay for them through a Dependent Daycare Account.

The tax credit is designed to become less valuable as your income increases, while the Dependent Daycare Account becomes more valuable as your income increases.

You may not claim a tax credit on your income tax return for dependent daycare expenses that were reimbursed from your Dependent Daycare Account. In addition, the amount of dependent daycare expense for which you may claim a tax credit is reduced, dollar for dollar, by the amount of expenses that are reimbursed from your Dependent Daycare Account.

For example, assume you have one dependent child. You set aside $2,000 in your Dependent Daycare Account and incur $3,400 of eligible dependent care expenses during the year. You will receive reimbursement of $2,000 from your Dependent Daycare Account and may claim a dependent daycare tax credit for $1,000 (not $1,400) on your federal tax return since $3,000 is the maximum federal tax credit allowed for one child.

IRS Form 2441

The Internal Revenue Service requires that you complete Form 2441—Child and Dependent Day Care Expenses—along with your federal income tax return if you participate in any daycare benefits during the year. The amount withheld from your salary for this purpose is reported in box 10 on your W-2 Form.