Child Care Exclusion W2 Box 10

[Corduroy Frog]

I find this "benefit" to be next to worthless.  Am I missing something?

Clients sign up for this benefit from the employer with a resounding "Whoopee!"  Reducing the income - yay,  yay.

Until tax time comes.  First of all, if the spouse doesn't work, all of the amount (typically $10,000) gets added back to Wages.  Then, assuming  the spouse DOES work and you attempt to take the child care credit - the base for the credit has to be reduced by the amount in box 10, which washes out any credit in most csses.

A few of my clients have gone back to their employer with a "take this credit and shove it".

Again, am I missing something?  As an added note:  the child care credit base has not been adjusted for inflation in dozens of years, except for the year of the pandemic.

[Lion EA]

Remember that the W-2 wages were reduced before FIT, SIT, FICA, and Medicare. So, even if the childcare exclusion gets added back to wages (because they don't qualify or don't qualify for it all) that they still save the FICA and Medicare.

Depending on their tax bracket, they might do better taking the credit instead of the exclusion.

If the non-working spouse is a student or is job hunting, they get some benefit.

Covid rules were more generous.

[Most of my clients have grown kids, so I rarely use this exclusion/credit anymore, so forgive me if I didn't report the most current rules.]

[Sara EA]

Why did your clients sign up for the Dependent Care FSA if one spouse doesn't work and was available to care for the child?  I find the credit to be extremely valuable for working couples.  With one child, only $3k of child care expenses can be used to calculate the credit.  By taking the Dependent Care FSA, $5k is not subject to income or employment taxes, which saves a bundle.  With more than one child, they get that benefit plus another $1k to calculate the credit.

[Corduroy Frog]

On 12/21/2024 at 9:04 PM, Sara EA said:

Why did your clients sign up for the Dependent Care FSA if one spouse doesn't work and was available to care for the child?  I find the credit to be extremely valuable for working couples.  With one child, only $3k of child care expenses can be used to calculate the credit.  By taking the Dependent Care FSA, $5k is not subject to income or employment taxes, which saves a bundle.  With more than one child, they get that benefit plus another $1k to calculate the credit.

Sara, surely you know the answer as it probably has happened to you:  They didn't ask their tax preparer.

It can work sometimes as you have demonstrated.  By the way, hidden between my lines is a complaint that they never seem to adjust the child care credit for inflation.

Sara, I always read your comments carefully, and believe you to be extremely astute.

[Sara EA]

The credit has been based on a max of $3k in child care expenses per child (up to two) since 2001, so you are right that it hasn't kept up with inflation.  Actually, it didn't cover the cost of care in 2001 either.  A look into the Congressional Record shows that there were (and are) policymakers who balked at adjusting the amount because they believed that mothers should stay home to care for their children.  Well, that worked in 1901, and maybe 1951, but here we are in 2025.

[Corduroy Frog]

On 12/31/2024 at 9:00 PM, Sara EA said:

A look into the Congressional Record shows that there were (and are) policymakers who balked at adjusting the amount because they believed that mothers should stay home to care for their children. 

It's incredible how far removed these people are from the real world.