By Dr. Jim Dahle, WCI FounderToday, we're going to talk about your kids and some of the fun ways they can save you some money on your taxes. Don't have kids thinking you'll save money, of course. You won't. But if you have kids, you should probably be aware of the content of this post.
Child Tax Exemptions
You used to get exemptions for your kids. In 2018, Congress dumped them in exchange for higher standard deductions. The higher standard deductions don't help those of us who were itemizing, but those exemptions are still gone. They might NOT be gone on your state taxes, though. Utah's main tax form, the TC-40, still allows a personal exemption of $2,046 per dependent [2025]. These go through a complicated adjustment along with your standard or itemized deductions as your income rises, but we're still getting something for our kids on our state taxes that we don't get on our federal taxes.
The Child Tax Credit
What you get on your federal tax return for those kids is the Child Tax Credit. On the 2024 Form 1040, this is found on line 19 and is subtracted from your calculated tax to get your total tax. The Child Tax Credit flows to line 19 from Schedule 8812, which looks like this:
Child Tax Credit Phaseout
The first thing you need to know about the Child Tax Credit is that if you make too much money, you don't get it. However, this might be one of the most complicated phaseouts of any tax credit out there. The more kids you have, the higher your phaseout becomes. The phaseout starts at $200,000 single and $400,000 Married Filing Jointly (MFJ) and is 5% per $1,000 ($2,000 MFJ) in MAGI. Thus for one child the phaseout ends at $220,000 for singles and $440,000 MFJ. The basic calculation of the end of the phaseout for a couple filing Married Filing Jointly (MFJ) is
MAGI = $400,000 + ($40,000 x number of dependents)
So if you have enough kids, you could theoretically qualify for the child tax credit even with a MAGI of $600,000. Let's say you have 8 dependent kids. The end of your phaseout occurs at
MAGI = $400,000 + ($40,000 x 8) = $720,000
So you are gradually phased out between $400,000 and $720,000.
So while many high-income professional families are phased out of this, you need to run the numbers.
Size of the Child Tax Credit
For 2024, the maximum tax credit is $2,000 per dependent child under 16. Note that this is a smaller amount than it has been in prior years. You also can't get the credit early like you could in some earlier years. There were special pandemic-associated adjustments to these credits in the past. Part of the credit ($1,700 per child) is refundable, meaning you get cash back even if you don't owe any taxes. The refundable portion of the credit is referred to as the “Additional Child Tax Credit.” It is not another separate credit. It's the same $2,000 credit. It's just the refundable portion of that. Very confusing. Sorry about that. Not my fault. But that's what the second page of Schedule 8812 is all about.
More information here:
How Your Kids Can Lower Your Taxes
How My State Rewards My Kids for Working
The Child and Dependent Care Tax Credit
A separate tax credit—and one which white coat investors do not get phased out of (except for 2021 when it phased out at an AGI of $438,000 for just one year)—is the Child and Dependent Care Tax Credit. While not as generous as it was in past years (again, there were “emergency” pandemic-associated changes to this credit), this can be a much larger tax credit than the Child Tax Credit. However, you don't get it just for having kids and taking care of them yourself. You have to pay someone else to take care of your kids to get it. And you then have to go work (or at least look for work) while they're being taken care of. You can't go to school, travel, or just watch Netflix and still claim the credit.
The person you pay to take care of the child can be anybody, EXCEPT your spouse, your dependents, your children 18 and under, or the parent of the child. Grandma and Aunt Sally are fine. So is the daycare down the street and many after-school programs.
If married, you have to file a return as Married Filing Jointly to claim this. If you're doing the PAYE/MFS student loan thing to try to maximize your PSLF, you lose this credit. You also have to rat out the caregiver to the IRS. Yes, they're going to have to declare this as taxable income if you're going to get the credit. You also have to file Schedule H if that person is your household employee and you paid them more than $2,700.
This credit is claimed by filing IRS Form 2441. The 2024 version (two pages) looks like this:
Who Are Qualifying Dependents?
To claim this, the care you paid for must have been for one or more of the following people:
- Your dependent child under 13 (teenagers are supposed to not need childcare)
- Your disabled spouse who cannot care for themself and lived in the house for at least half the year
- Any other disabled dependent who lived in the house for at least half the year with an income < $4,400 who does not file a joint return, and neither you nor your spouse are a dependent on anyone else's return.
How Much Is the Child and Dependent Care Credit?
The maximum credit for most WCIers is 20% of $3,000 ($600) for one child or dependent and $1,200 for two or more. You don't get a credit for all of your paid expenses, only 20%-35% of them, depending on your income. If your AGI is $43,000+, like most white coat investors, it's 20%. Still, it beats a kick in the teeth, so if you qualify for it, claim it.
More information here:
How to Hire Your Kids for Taxes the Right Way
Dependent Care Flexible Spending Accounts
Speaking of deductions, the best one in this regard is known as a Dependent Care Flexible Spending Account (FSA). This is slightly different from a Heathcare FSA. If your employer provides this benefit, single and MFJ filers can put up to $5,000 into it (note that this was less than was allowed in 2021 due to the pandemic emergency and that those filing MFS can only put $2,500 into it). Like other FSAs, this is use-it-or-lose-it money, so don't put more into the account than you will actually spend on dependent care for the year.
Yes, you can have and use a Dependent Care FSA and a Health Savings Account (HSA) in the same year. It gets more complicated if you want to use a Dependent Care FSA and claim a Child and Dependent Care Tax Credit in the same year if there is more than one child.
You may find that you basically have to choose between the Dependent Care FSA and the Child and Dependent Care Tax Credit. If so, you should probably choose the FSA. The deduction will be worth more than 20% for almost all white coat investors because your marginal tax rate will be greater than 20%, especially when you include state taxes. But I suppose there are some situations for lower earners (residents in tax-free states?) where the tax credit could be bigger, especially if your income is low enough to get you a higher multiple than 20%.
Remember that you cannot double dip. You cannot pay for expenses with a Dependent Care FSA and then claim those same expenses on the Child and Dependent Care Tax Credit.
Kids are great, but they're not cheap. Take advantage of credits and deductions that help reduce the cost a bit.
What do you think? Which of these do you qualify for and use? What other questions do you have?
Just wanted to add that for my employer’s dependent care FSA administered by WEX, I was only able to contribute $2,500 due to being a “highly compensated” employee.
Per the plan information:
“The IRS defines employees who earned $155,000 or more in 2024 as “highly compensated,” and limits their 2025 DepCare FSA contributions to $2,500.”
https://ucnet.universityofcalifornia.edu/benefits/home-family/depcare-fsa/
I tried to verify this by searching for the IRS documentation that supports it but was unable to find any official IRS resource that outlines the contribution limits for these dependent care FSAs.
Thanks for sharing your experience. The highly compensated rules trip up a lot of WCIers, but usually with retirement accounts, not FSAs.
Jim,
Please help! I tried to find more information on this and there is nothing on the IRS website. I did find 4 different limits on 4 different websites for employers in 4 different states. The UC one above and these 3 below. Could this be state or employer dependent? I took the full deduction in 2023 and 2024. Not sure if I should contact my employer or CPA.
https://www.nyu.edu/employees/benefit/full-time/administrators-professionals/benefits-guide-2025/flexible-spending-accounts/dependent-care-fsa.html
https://hr.umich.edu/benefits-wellness/financial/flexible-spending-accounts/flexible-spending-account-eligibility-enrollment#:~:text=Maximum%20Annual%20Dependent%20Care%20FSA%20Contribution%20Limits&text=$5%2C000%20if%20your%202024%20earnings,earnings%20were%20$155%2C000%20or%20more
https://peba.sc.gov/sites/default/files/2024_dcsa_faq.pdf
It’s not clear to me what you’re asking. Are you trying to figure out exactly how the testing rules work for FSAs and highly compensated employees? If it’s anything like retirement accounts it’s not a DIY project.
I am trying to figure out what the max allowed Dependent Care FSA contribution is for highly paid employees. Or should I just ask my HR or just keep doing the $5k until they tell me otherwise?
And whatever it is, so in order to get the max deduction it would be 20% of $3k per child up to 2 children above whatever you are allowed to save in your dependent care FSA? The end of the article hasn’t been updated to reflect the changes in the middle of the article.
Thank you!
The testing likely involves what all the lower paid employees at the company contributed to their FSAs. That’s how it works for retirement accounts. So yea, ask HR.
Thank you for this informative post.
There should be a correction here. For high earners claiming the child and dependent care tax credit, you can get 20% of $3,000 or $6,000 ($600 or $1200) depending on how many kids you have. You can’t get a $6,000 credit by spending $30,000 on childcare.
Line 3 says to enter your childcare expenses UP TO $3,000 or $6,000.
Line 9 says to multiply that by 0.2.
That’s your credit.
Thank you. Yup, I blew that one. I’ll fix it now.
Thanks for another great article, Jim! In addition to what MC has pointed out regarding the child and dependent care tax credit, it appears that the dollar amount of expenses on which the credit is calculated on is reduced if one contributes to a dependent care FSA.
See the section of reduced dollar limit in publication 503.
To illustrate, in Form 2441, part III,
Line 27 is the max amount of expenses to calculate the credit on – $3,000 for one kid and $6,000 for 2
Line 28 is essentially the amount one contributes to the FSA
Line 29 asks to subtract line 28 from line 27.
And subsequently apply the percentage (0.2 for high earners to calculate the credit).
Essentially if one were to follow these instructions, a family with 2 kids contributing $5,000 to a dependent care FSA will only get 0.2*(6,000-5,000)=$200 of tax credit.
A family with one kid contributing $5,000 to a dependent care FSA will not be eligible for dependent care tax credit since $3,000-$5,000 is less than zero.
Thanks for the clarification.
I also got my Dependent Care FSA reduced …..the employer indicated that it is because I am a highly compensated employee. THey decided this in December 2024 and are applying this retroactively to 2024, after I already made the majority of the contributions and also started getting some money reimbursed. So it will be a pain to reconcile.
The administrator of the FSA does not think that is correct (about the highly compensated employee), but say they have to go along with it.
Is there anything I can do about this? Does anyone know if this highly compensated thing is true for FSAs?
Sounds like it is true according to this:
https://hr.vanderbilt.edu/benefits/highlycomp-fsa.php
Thanks for the content-rich article. Appreciate that you’ve continued to put out the hits.
Would you recommend the dependent care FSA as a strategy for self-employed folks? Any concerns to look out for?
Also, any tips on spending requirements? Would money spent on tutoring, sports clubs, or after-school programs qualify?
The government has a long list of sample expenses and whether they qualify. Tutoring and sports do not. Structured after school programs do.
https://www.fsafeds.gov/explore/dcfsa/expenses
Haven’t heard of that as a strategy before. It’s probably allowed. If you’re going to spend the money on childcare, then sure, might as well do the FSA if it is allowed. This article suggests it’s okay:
https://www.newfront.com/blog/dependent-care-fsa-where-spouse-works-from-home-or-is-self-employed
What if you don’t have a income that not taxable how do you get them credits then.
I don’t think any of the credits discussed in this post are refundable. So if you don’t have a tax bill, that’s it, you just don’t get them.
Actually, the child tax credit is partially refundable. NThe child and dependent care credit has at least been refundable at times in the past too. Not an issue WCIers run into very often though.. There aren’t very many of them without a tax bill.
I’m so tired of all these tax credits for married people, when a single person pays more and gets nothing. And how about those people single and married working two full time jobs, there should be some tax credits for them after all that are doing twice as much. I’m also tired of people that are tax exempt, if you were to eliminate tax exemptions, people with visa’s, imagine how much money there would be?
I am biased because I am a parent… but I feel the opposite… I’d like to see more tax breaks for families. Especially now as parenting has become less and less popular.
These aren’t tax credits for married people, they’re tax credits for parents. And there are a lot of single parents out there.
Unfortunately, our progressive tax code is not set up to incentivize you to work hard. Not sure how much exemptions cost, nor what you mean by “people with visas”.
I have guardianship with my granddaughter and do not really work because I’m on social security but I can’t get the income tax child credit because I don’t work I take care of her and not their job in itself I take care of her and not their job in itself
I’m sure that past time hobby of picking up cans may be considered as self employed work and fall within the limits of the social security restrictions so I would go that route and make sure to claim for watching the child…..talk to your preparer
You’ve pointed out a truth about our progressive tax code. Because high earners pay most of the taxes, they also get most of the tax breaks. There aren’t a lot of tax breaks for people who don’t pay taxes. Earned income credit and the retirement savings credit are two that come to mind though.
DCFSA limits for single and head of household filers are also $5,000. I think that MFJ is $5K and MFS is $.25K . From what I know of custody and tax rules after divorce, even if 50:50 custody, the “custodial parent” is the parent that has the children >50% of nights, and also provides more than 50% of the financial support. And only that custodial parent can declare a DCFSA. (Yes, I end up “counting nights” to ensure I can file HOH and use my DCFSA – esp as unused DCFSA reverts to my employer)
Thanks for this article! But I am still confused by a couple things. You state that:
“Yes, you can use a Dependent Care FSA and claim a full $6,000 Child and Dependent Care Tax Credit in the same year. Of course, you’d then have to spend $35,000 on childcare to max out both, but I’m sure there are WCIers out there doing just that.”
Is that right, though? I thought the max credit was $600 for one child, not $6000. And where does the $35000 number come from? As Tom commented above I don’t think you can get the credit and contribute $5000 to the FSA for one child no matter how much you spend. However, for two or more children, it does seem like you can contribute $5000 to the FSA and still get a credit of $200 max if you spend $11000 or more on childcare. Or am I missing something?
Part of the challenge of this article is that the rules on this are changing so rapidly. I wrote the article in one year, then the rules changed before it was published and then changed again. So as I try to keep it correct, I end up updating part of the article and not another part. So anyone reading the article and then the comments is probably wondering what is going on. So every time I get a question on it, I literally have to do all the research again and basically write the entire article all over again. Plus it’s confusing and I’ve made at least one mistake somewhere along the way. Might be easier to just delete the entire thing. I don’t blame you for getting confused. I get confused every time I look this stuff up.
I’ve changed $6,000 to $600 and deleted the $35,000 reference in both places it existed in the original article now so hopefully it’s correct. I think you’re right that you’d need two kids to do the FSA and a credit in the same year.
Thanks for the updates and getting back to me. I appreciate it! I don’t understand why they have to make this so confusing… 😛