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Are flexible spending accounts better than the child care credit and medical expense deduction?

Updated on November 26, 2008

Flexible spending accounts are accounts offered through your employer where you deposit money from your paycheck into a fund before your taxes are deducted.

Whenever you need to pay for daycare or medical expenses, you submit a receipt and get reimbursed from your fund. In essence, you pay for daycare and medical expenses with pre-tax dollars, saving you money on your taxes.

Some may question if they should use the flexible spending accounts, or wait untill tax time to use the child care credit and medical deductions credits. Information explaining flexible spending accounts are usually ambiguous when it comes to determining which saves you more money on your taxes.

The answer is almost always that flexible spending accounts are the better tax saving device. You should always use flexible spending accounts instead of claiming the child care credit or medical expense deduction. Here's why.

If you wait till the end of the year and use the child care tax credit, you are only allowed 20% of your total eligible expenses for the year. In other words, if you paid $5,000 in child care for the year, you are only able to deduct $1,000; whereas if you used your employer's flexible spending account, you can deduct the entire $5,000 through contributions.

The same thing applies for medical expenses. The IRS only allows you to deduct medical expenses that are more than 7.5% of your adjusted gross income. In other words, if you make $40,000 a year, that equals $3,000. So you could only deduct anything over $3,000. Most people do not accumulate enough medical expenses to meet that threshold. And even then, you can only deduct anything over that amount, which does not even make it worth deducting.

If you are fortunate enough to have an employer that offers flexible spending accounts, take advantage of them. They will save you far more money than if you use wait untill tax time to use the regular tax deductions.


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