DEPENDENT CARE EXPENSES: TAX DEDUCTION VS. TAX CREDIT

Under federal tax law, there are two methods for receiving a partial reimbursement of your work-related child and dependent care expenses through federal income tax savings. The methods are the dependent care reimbursement account offered through our Tax Saver 125 Plan and the child and dependent care credit used at the time of filing income tax returns. Each method has a limit on the amount of child and dependent care expenses that are eligible; and, of course, you cannot use both tax benefits for the same expense amounts. The definition of eligible expenses for both methods can be found in the Qualifying Dependent Care Expenses section of this document. The purpose of this comparison is to assist you in determining which method is more advantageous to you.

CHILD AND DEPENDENT CARE CREDIT - Form 2441

The child and dependent care tax credit allows for a credit of between 20% and 35% of eligible dependent care costs. The credit cannot be claimed on more than $3,000 of expenses for one dependent, or $6,000 for two or more dependents. A credit of 35% of eligible expenses is available if your family's annual adjusted gross income is $15,000 or less. The credit is reduced by one percent for each additional $2,000 (or fraction thereof) of income over $15,000. For example, if a family's adjusted gross income is $19,500 they would be eligible for credit of 32% of their eligible dependent care expenses. Once adjusted gross income exceeds $43,000 the credit is limited to 20%.

DEPENDENT CARE REIMBURSEMENT ACCOUNT

The dependent care reimbursement account permits you to reduce your taxable income up to $5,000 (without regard to the number of dependents you have) by converting a portion of your compensation to non-taxable dependent care benefits. By using a dependent care reimbursement account, a portion of your salary is placed in a pre-tax account from which you are reimbursed for qualifying dependent care expenses and reimbursements from the account are not subject to tax when you file your income tax return. Please remember any amount remaining in your account at the end of the plan year will be forfeited.

Which method is more beneficial?

The method most beneficial to you depends on your family's adjusted gross income and the number of eligible dependents.

A family whose income falls in the 27% federal income tax bracket will almost certainly qualify for a tax credit less than 27% using the child and dependent care credit. Therefore, a dependent care reimbursement account should be more beneficial.

A family whose income falls in the 15% tax bracket should carefully consider which option is most advantageous, because salary reductions that go into your dependent care reimbursement account are also exempt from Social Security and state income taxes. Which means a family in the 15% income tax bracket would receive a savings of 22.65% in combined taxes. A family's adjusted gross income must be less than $24,000 for the tax credit to be more beneficial. However, even when your income is less than $24,000, it may be advantageous to use a dependent care reimbursement account.

Is a Dependent Care Reimbursement Account right for me?

Your Dependent Care Reimbursement Account can provide a convenient way for you to pay for dependent care expenses and save valuable tax dollars at the same time. If any of the following apply to you, you may benefit from a Dependent Care Reimbursement Account:

• Do you pay for after school care or day camp for a dependent child under age 13?
• Do you pay for the care of a disabled adult who lives in your house and is your dependent?

The following comparisons illustrate the difference in paying dependent care expenses with and without a Dependent Care Reimbursement Account:

NOTE: Both examples assume the employee is married and claiming two exemptions. As illustrated in the comparison, the individual electing to use a Dependent Care Reimbursement Account had an additional $695 in Net Take-Home Pay. Tax savings may differ depending on income, withholding status, exemptions, and annual dependent care expenses. Detailed tax tables and worksheets are available from Human Resources; call ext. 1576 to receive a copy.

QUALIFYING DEPENDENT CARE EXPENSES

Under the plan, you will be reimbursed only for dependent care expenses meeting all of the following conditions:

1. The expenses are incurred for services rendered after the date of election and during the plan year that runs from July 1 through June 30.
   
   
2. Each individual for whom you incur the expense is:
   
   
   • A dependent under age 13 whom you are entitled to claim as a dependent (or child or other dependent under age 13 whom you are supporting, but are not entitled to claim as a dependent only because of a written declaration or decree of divorce) on your federal income tax return, or
     
     
   • A disabled spouse or other tax dependent (i.e. a child you are supporting, but are not entitled to claim as a dependent only because of a written declaration or decree of divorce; or a dependent parent) who is physically or mentally incapable of caring for himself or herself.
     
     
3. The expenses are incurred for the care of a dependent described above, or for related household services, and are incurred to enable you to be gainfully employed.
   
   
4. If the expenses are incurred for services outside your household, they are incurred for the care of a dependent who is described in 2(a) above, or who regularly spends at least 8 hours per day in your household.
   
   
5. If the expenses are incurred for services provided by a dependent care center (i.e., a facility that provides care for more than six individuals not residing at the facility), the center complies with all applicable state and local laws and regulations.
   
   
6. The expenses are not paid or payable to a child of yours who is under age 19 at the end of the year in which the expenses are incurred.
   
   
7. The expenses are not paid or payable to an individual for whom you, or your spouse, are entitled to claim a personal tax exemption for as a dependent.

DEPENDENT CARE REIMBURSEMENT ACCOUNT WORKSHEET

Federal Limits: $5,000 married filing joint or single head of household
                        $2,500 married filing separately

Weekly Expense x Number of Weeks = Next Year's Projected Expense

                           X                                =                                               

It is important to plan carefully when making your decision about the amount of salary you elect to contribute to your reimbursement accounts. Per IRS Regulations, any money left unspent in your accounts will be forfeited at the end of the plan year. Here are some important points to keep in mind when you estimate your eligible medical care and/or dependent care expenses:

• The Medical and Dependent Care Reimbursement Accounts are completely separate. Money from the Medical Reimbursement Account cannot be used to pay dependent care expenses or vice versa.
• If you're not sure of the cost for a particular service it's better to use a conservative estimate so you don't risk overestimating.