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|
|Pre-tax DCA deduction||- 0||- 50.00|
|Taxable Gross Income||$500.00||$450.00|
|State (4.4%)||- 22.00||- 19.80|
|Reimbursement from Dependent Care Account||+ $0||+ $50.00|
|Spendable Income||$364.75|| |
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)