How to handle Child Care Tax Credit with Dependent Care FSA for 2023 and 2024 taxes?

The Child Care Tax Credit and Dependent Care FSA interactions can definitely be confusing! Let me help clarify this for you. For your 2023 situation: You're not required to claim the Child Care Tax Credit when you've used DCFSA funds, but your tax software is likely flagging this because it wants to check if you're eligible for additional benefits. Since you only spent $495 on childcare and it was fully reimbursed through your DCFSA, there's no additional tax credit available to you for 2023. You should be able to indicate in your tax software that these expenses were reimbursed through your DCFSA. For 2024: Since you plan to contribute $5K to your DCFSA but expect $9-10K in expenses, you potentially could claim the Child Care Tax Credit for the amount over your DCFSA limit. You can't "double-dip" - meaning you can't claim the credit for expenses reimbursed by your DCFSA, but you can claim it for qualifying expenses above what your DCFSA covers. Regarding your daycare's offer: It's unusual for a daycare to offer different rates based on whether you claim the credit. The daycare is required to provide you with their tax ID information (on Form W-10) regardless of whether you claim the credit. They don't actually get notified about whether you claim it or not.

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For your 2024 planning, don't forget that you need to look at your marginal tax rate to decide what's best. In some cases, the tax savings from the DCFSA (which reduces your income pretax) might be better than the Child Care Credit (which is partially refundable but has income limitations). When our family did the math, maxing out the $5K DCFSA and then claiming the credit for expenses above that was optimal. But the daycare offering a lower rate in exchange for not claiming the credit is bizarre. They're required to give you their tax info regardless, and they report all income no matter what.

I just went thru this with my 2023 taxes. If you spent $495 and got reimbursed from your FSA, you cant claim those same expenses for the tax credit. That would be double dipping. You can only claim expenses ABOVE what your FSA covered. Your daycare cant actually tell if you claim the credit or not. They just need to provide you with their tax ID. They're probably trying to offer a cash discount or something to reduce their reported income. Kinda sketchy tbh.

One thing nobody mentioned yet - make sure your daycare gives you a statement with their tax ID number (EIN or SSN) at the end of the year. You need this regardless of whether you're claiming the credit or using FSA funds. If they refuse or seem sketchy about providing it, that's a huge red flag!

Just wanted to add another perspective here - I'm a tax preparer and see this confusion all the time! For your 2023 situation, you're correct that you can't claim the Child Care Tax Credit for the $495 that was reimbursed through your DCFSA. Your tax software is probably asking for the provider info because it needs to verify that you used qualified expenses, even if you're not getting an additional credit. You should enter the provider information but indicate that the expenses were reimbursed. Regarding your daycare's offer for 2024 - this is definitely unusual and potentially problematic. Legitimate daycare providers should charge the same rate regardless of your tax choices. They have no way to know if you claim the credit, and it doesn't affect their tax liability. I'd be cautious about any provider trying to tie their pricing to your tax decisions. For your planning, with expected costs of $9-10K and a $5K DCFSA contribution, you'd potentially be able to claim the Child Care Credit on expenses above the $5K that wasn't covered by your FSA. Just remember the credit has income limits and phases out at higher income levels. Make sure to keep all your receipts and get the provider's tax ID regardless of which benefits you use!