Tax Implications of the DCRA
You can save 25% or more on the money you spend on eligible expenses by contributing to the reimbursement account on a pre-tax basis. However, you should be aware of the other financial implications of using these accounts. To see how DCRA contributions work with benefits received from the Cyert Center, read the Child Care Benefits - Tax Implications (.pdf) document.
- State income taxes: Pennsylvania does not recognize pre-tax benefit
contributions for the Dependent Care Reimbursement Account. Therefore, the money you contribute to a DCRA will be subject to state taxes.
- Impact on Social Security: When you reduce your taxable income for
Social Security purposes, you may also reduce by a small amount what you may
claim in Social Security benefits at retirement.
- Earned Income Tax Credit: Paying for benefits on a pre-tax basis
may put employees who are eligible for the Earned
Income Tax Credit at a disadvantage when they file for federal income
tax credits.
- $5000 Limit: The IRS limits the amount of tax-free child care benefits one can receive. Benefits received through the Cyert Center, the DCRA and any other tax-free child care benefits are included in this figure. Any tax-free child care benefits you receive in excess of $5,000 will be taxed as though it were income.
Dependent Care Tax Credits
The IRS allows you to claim work-related, dependent care expenses for credit when you file your income tax return. In some cases, you may save more money through a tax credit than through the Dependent Care Reimbursement Account. You may be able to make use of both tax breaks, but you cannot use both the tax credit and the Dependent Care Reimbursement Account for the same expenses. The IRS permits a dependent care credit of no more than $2,400 per child up to a maximum of $4,800 a year; this tax credit is offset dollar for dollar by any amount placed in a reimbursement account. The tax regulations regarding this benefit are complicated for those who use the Earned Income Tax Credit. Review the instructions published by the IRS carefully or consult a tax expert for advice.