Social Security Tax (FICA): Contributions to DeCAP may reduce your Social Security taxes. If so, based on current Social Security law, Social Security benefits at your retirement age may be slightly less as a result of your participation in DeCAP. However, the effect would be minimal and would be offset by the amount saved in taxes today.
Pension: Contributions to DeCAP have no effect on your pension contributions or benefits.
Deferred Compensation: Contributions to DeCAP will have no effect on your participation in a 457, 401(k), Roth 401(k) or 403(b) plan.
DeCAP & Taxes
Contributions to DeCAP are made through automatic payroll deductions on a before-tax basis. Therefore, your gross income on your Form W-2 will be reduced for federal income taxes and Social Security taxes (FICA). DeCAP will not affect your state or local taxes.
Learn more about your W-2 Wage and Tax Statement from the Office of Payroll Administration
Learn more about Social Security from the Office of Payroll Administration
DeCAP and the Federal Dependent Care Tax Credit
The expenses that qualify as eligible employment-related expenses are generally the same for the Federal Dependent Care Tax Credit. Any expenses paid or reimbursed under DeCAP cannot be taken into account when calculating the Federal Dependent Care Tax Credit and vice-versa.
Please note that any payments received from DeCAP will reduce dollar-for-dollar the amount that can be considered for a Federal Dependent Care Tax Credit and vice-versa.
When deciding between using the Federal Dependent Care Tax Credit, or DeCAP participation, you should note that if you participate in DeCAP and DeCAP covers all your dependent care expenses (or you contribute the maximum amount under DeCAP), then you are not eligible for the 20% New York State tax credit for dependent care expenses.
For some employees, the Federal Dependent Care Tax Credit provides more tax savings; for others, DeCAP is better. The tax advantage between DeCAP and the Federal Dependent Care Tax Credit will vary depending on your income, whether you pay FICA taxes, the number of your dependents, and your eligible expenses.
For example, DeCAP allows $5,000 as a maximum benefit for one dependent, while the Federal Dependent Care Tax Credit allows a maximum benefit of $3,000 for one dependent ($6,000 for two or more dependents). However, while DeCAP reduces your taxable income, the Federal Dependent Care Tax Credit reduces your actual taxes.
You should also take into consideration that participation in DeCAP gives you an immediate reimbursement of eligible employment-related dependent care expenses; you need not wait until after the end of the year when you file your tax return and use the Federal Dependent Care Tax Credit.
The following example depicts the difference between DeCAP and the Federal Dependent Care Tax Credit based on the federal tax withholding table effective January 1, 2014. The following projections made are only estimates of federal tax information and should not be assumed to be tax advice. Be sure to consult a tax advisor to determine the appropriate tax advice for your financial situation.
Please note the adjusted gross income amount in the following example assumes there are no other income adjustments.
Scenario: Married employee with a family income of $70,000 with two dependents (with Federal Dependent Care Tax Credit applying to both dependents) and filing jointly; DeCAP annual contribution of $5,000 and employee incurs $4,952 in reimbursable dependent care expenses.
|Before-Tax Reduction for Dependent Care Expenses
|Adjusted Gross Income
|Federal Income Tax
|Social Security Tax
|After-Tax Cost of Dependent Care Expenses
|Federal Tax Credit
|State Tax Credit
|Take-Home Pay (assuming no other payroll deductions)
|DeCAP Tax Savings
||$54,532 - $54,168= $364
While you may use both DeCAP and the Federal Dependent Care Tax Credit in the same tax year, you must be sure that:
- Your eligible expenses are reduced by what you receive in that tax year from DeCAP, and
- You do not claim the same expense more than once.
Calculate your approximate tax savings with DeCAP
Read the DeCAP FAQ