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Eileen files as head of household and earns a salary of $75,000. She has a 4 yr old dependent daughter for whom she pays $5,000 in annual day care expenses so that she can work. Eileen’s employer offers a dependent care flexible spending arrangement (FSA) in which she could contribute up to $5,000 on a pre-tax (before FICA and income tax) basis. If she does not participate in the FSA, Eileen can claim the dependent child care credit for these expenses. Eileen has no other income or deductions. Compute the tax savings of these two alternatives and make a recommendation to Eileen.
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