Spending accounts and the child-care credit

Dear Tax Talk,
My husband's company offers a dependent spending account. In 2003, we contributed and claimed only $3,000 in that account, but our child-care expense in 2003 for one child only is more than $5,000. Can I claim the $2,000 difference as a tax credit on the federal dependent care tax credit form? Please help me on this question because I couldn't find the answer on the IRS Web site. Thank you very much for your help! -- Kun Yang

Dear Kun,
A child-care credit of generally 20 percent of the amount spent for the care is available to two-earner families and single parents. If you (or you and your spouse combined) make less than $43,000, the credit is higher than 20 percent; it goes up to 35 percent for workers making no more than $15,000. But for most folks making a middle-class living, the credit is 20 percent of the amount spent for child-care services.

The maximum amount of expenditures that qualify in any one year is $3,000 for one child and $6,000 for two or more children. These limits are up from the historical limits of $2,400 and $4,800 used in the past decade or so. The creditable expenses have to be higher than the wages of the lowest earning spouse. For example, in order to get the 20 percent credit on $6,000 in child-care expenses, both spouses would have to earn at least $6,000. If one spouse only earned $4,000, then the credit would only be 20 percent of $4,000.

Some employers offer flexible spending accounts that allow an employee to defer a portion of their salary to pay for dependent care expenses on a pretax basis. This is for most folks better than the credit, as the tax rate is usually higher than the 20 percent credit. Unfortunately in your case, since your maximum deferral is equal to the credit limit, the difference is not creditable. You can run through the equation that gets you this result on page 2 of Form 2441.