Depending upon your particular tax situation, it may be more advantageous to you to use the tax credit rather than a DCRA exclusively. The amount of the DCRA exclusion is limited to $5,000 per tax year ($2,500 for married individuals filing separate returns). If the applicable limitation is exceeded, the excess is included in income and taxable. Use the Dependent Care Tax Credit Worksheet to help you determine which option is best for you.
The IRS allows an income tax credit of up to $6,000 of dependent care expenses if you have two or more dependents (up to $3,000 for one dependent). The amount of the credit is based on your adjusted gross income and applies only to your Federal taxes. So, while the maximum allowed under a DCRA is $5,000, you may be able to apply the incremental difference between the DCRA maximum and the Child and Dependent Care Tax Credit depending on your tax situation. For more information about this tax credit, please see IRS Form 2441 and the accompanying instructions.
Please consult a tax professional if you are unsure of which option is more beneficial for your particular tax situation.