Child Care Credit

[jjtrcka221]

Is it just me, or for 2021 does it look like most clients would have been better off including dependent care benefits reported in box 10 of the w2 in box 1, and then just taking the full credit?  The software seems to agree.  Is it possible to reclass this?

[Just-Lisa-Now-]

Like we do with scholarships? Claim it as income and taking the full educational credit.

Im not sure that's an option with DCB since you'd be purposefully avoiding the SS/Mdcr tax on that DCB amount.

[jjtrcka221]

Yeah. If the didn't spend it on DCE it would be taxed like it was in box 1.  I wouldn't feel right just changing it thought, since that is not how it was reported on the W2 (and like you said with ss).  I just hate to feel like I'm leaving money on the table for them.  Crazy that it would have been better to not have pre-tax dollars  pay for it. 

[mm1]

Even though it would be better for the client not to use pre-tax dollars for dependent care, you cannot change it for the reason above (medicare and social security taxes) and you cannot just change a W-2 that has been reported. The reason it is better to pay child care with after tax dollars is simply the fact that one is a credit that reduces taxes dollar for dollar while the pre-tax just reduces taxable income so the effect is at the taxpayer's tax rate. I advise my clients in the first year that I see them using pre-tax dollars to pay child care that they are hurting themselves by doing that and show them the difference. They stop it immediately. Unfortunate that they lose that the first year but I can only help them if they ask me or let me know they are thinking about it.

[sjrcpa]

It depends on the client's tax bracket.

For my clients it is usually better to pay with tax free dollars than to get a lower, or no, credit.

[mm1]

You are so correct about that.