Preferred DCA Header - How Can It Reduce Your Taxes

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Preferred DCA - How Can It Reduce Your Taxes?

Spending accounts reduce your taxes by reducing your taxable income. Using these pre-tax accounts can make a significant difference in your take-home pay.

 

Mary has one child and works. She pays $200 per month for day care. Let's look at how a Dependent Care Account can help Mary.

 

Employee Status: Married, three federal exemptions
Weekly Salary: $500

 

Example Without Dependent Care Account With Dependent Care Account
Gross Pay $500.00 $500.00
Pre-tax DCA deduction - 0 - 50.00
Taxable Gross Income $500.00 $450.00
Less Taxes:    
FICA (7.65%) 38.25 34.43
Federal (15.0%) 75.00 67.50
State (4.4%) - 22.00 - 19.80
Net Pay $364.75 $328.27
Reimbursement from Dependent Care Account + $0 + $50.00
Spendable Income $364.75

$378.27

 

 

Mary is paid weekly. She chooses to have $50 each pay period deducted from her gross salary. Because Mary's taxable income is now lower, her taxes are less.

 

After Mary is reimbursed from her Dependent Care Spending Account, her total weekly spendable income increases. By the end of the year, Mary increases her spendable income by $703.04. ($378.27 - $364.75 = $13.52 x 52 weeks = $703.04)