Flexible Spending Account vs. Dependent-Care Credit
Money you set aside in a flexible spending account is not only subtracted from your paycheck before income taxes are calculated, but it also avoids the 7.65% Social Security and Medicare tax. So if you're in the 15% income-tax bracket, you won't have to pay the 15% federal tax or the 7.65% Social Security tax, which means that you'll avoid paying a total of 22.65% in taxes on that money. In that case, contributing the maximum $5,000 to your dependent-care flex plan cuts your tax bill by $1,133. The benefits get even better as your tax bracket rises. If you're in the 25% bracket, for example, you'll end up saving 32.65% in taxes on the money you contribute to the FSA -- and lowering your tax bill by $1,633. You'll save even more if your FSA contribution escapes state income taxes.
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