Dependent Care Flexible Spending Account (FSA): Eligibility, Expeneses & more

Dependent Care Flexible Spending Account – How Does It Help in Saving on Child Care

Your child is a being of wonder. Her whacky clamouring and insane (read, sweet) demands to fill each of your moments with zany amazement- the magic she bequeaths to your world is like no other. She’s the reason you want to wake up each morning and go to work. Because she deserves nothing but the best.

How many times have you caught yourself feeling like this? And how many times have you, in this flow of thought, worried about the expenses that sticker-bomb your plans? Childcare in the United States is expensive and that’s a major cause of worry. It’s indispensable that your child gets vital care during his early years, for they can shape the course of his life. But luckily, the IRS gives you a lucrative option in the form of a Dependent Care FSA.

What is Dependent Care FSA?

Approved by the Internal Revenue Service, a dependent care FSA is the tax-advantage plan that you’re sure to be happy to have come across. Your employer offers you this plan wherein you deposit funds from your paycheck throughout the year- and reap the benefit of dependent care reimbursements like your kid’s preschool, his summer day camp, those cool after school programs, or even adult daycare.

Eligibility For Dependent Care Account

The Dependent Care FSA is only offered through your employer- it cannot be procured otherwise. The main motive of the IRS in this context is to allow working individuals like you a tax benefit that goes in tandem with your dependent and child care tax credit. As with any IRS-approved policies, there are eligibility requirements to be met.

  • Here’s something important: the dependent you’re claiming for needs to live in the same house as you. If he lives with you for only a portion of the year, you will be able to claim expense reimbursement for incidentals only during that period.
  • Eligible claimants are- children under the dependent care FSA age limit of 13, elderly parents, or a spouse that needs special care.
  • Also included are tax dependents like children more than 13 years old who cannot care for themselves due to a physical/mental impairment.

Working Of Dependent Care Flexible Spending Account

The Dependent Care Flexible Spending Account is a smart, stress-free way to save money while taking care of your little goofball or best-drinking-buddy / dad as you keep working. In this, you use your pre-tax dollars to pay qualified out-of-the-pocket dependent care expenses. The dollars you contribute to this kind of FSA is not subject to your usual payroll taxes- that’s you end up paying less in taxes, and bringing home more of your monthly paycheck! It’s a win-win.

parents with bank account

Dependent Care FSA Eligible Expenses

Your child and dependent care expenses must correlate with your job to qualify for the credit you are to receive. Explicitly, your expenses are considered to be work-related only if they allow you (and your spouse, if you’re in it jointly) to work or look for work and are for the care for a qualifying person. Eligible dependent care expenses cover:

  • Adult daycare.
  • After-school or before school care for your kid. Also includes summer day camp (when the parent is not on vacation).
  • The agency and application fees you require to obtain care.
  • Au pair fees (including the background check fee).
  • Care at night for your lovable hoodwink (as you triage for that unforgiving work deadline).
  • Care while living in a foreign country.
  • Child care placement fees and custodial care expenses.
  • Care while you or your spouse are employed part-time or are looking for work: the housekeeping services (nanny)  that are provided alongside the usual child or dependent care service.

Non-Eligible Expenses for Dependent Care Reimbursement Account

Is the tricky part. We all get confused when weighing between expenses (“Oh this just seems so right!” Is this one a familiar feeling?)

Here are expenses that are ineligible going by the dependent care FSA rules:

  • Overnight camp expenses (generally any expenses related to education, like your kid’s field trips).
  • Child support payments (and for the elderly, assisted living payments).
  • Diaper fees, clothing and indirect expenses that are not required to obtain care.
  • Meals, snacks.
  • Medical care expenses or supply fees.
  • Summer school or volunteer work that your ward gets enrolled in.
  • Expenses for services that any of the other tax departments provide you or any of your dependents (including minors ).
  • Sports fees, music lessons.
  • Recreation fees or during when your dependent is unemployed (and not looking for work).

Benefits of Using a Dependent Care Flexible Account

And here is the million-dollar question in this sense: why do this? Why enrol in a dependent care flexible spending account? First of all, let’s get the stats right: the average annual cost of centre-based infant care amounts to 28% of the median income for single-fathers in the United States; its 49% for single moms and a whopping 79% for minimum wage earners. Factoring this and the millennial generation problem- millennials opt to not having kids at all in most states as they struggle to pay for childcare amidst their barraging expenses: it’s like child care is quite a hefty thing to commit yourself financially to, it’s been never this hard (money-wise, at least) to raise a child.

Well, we have done the work for you here though. Here are the benefits of joining FSA child care:

  • You save an average of 30 per cent when it comes to eligible expenses: hey that’s about $1100 at least, going by the median US monthly income per person!
  • This reduces your overall tax burden: the funds are withdrawn directly from your paycheck for deposit into your FSA, remember this is pre-tax- so it is before the taxes get deducted. Your total taxable income is reduced, meaning fewer taxes every time!
  • Dependent Care FSAs are sheltered from state taxes in most cases.
  • You have several convenient, hassle-free payment and reimbursement options out there: why not make the best out of what you got? Many FSAs are connected to your debit cards which means that the full pledged amount is available to you on your fingertips. Direct payment is always a good thing to do.
  • It’s like a retirement plan, while you are working. Need we explain more?

Drawbacks Of DCFSA

Two sides of every coin. There’s always green on the other side. But you have to weigh your options. There are drawbacks to dependent care flexible spending accounts and you must understand them properly before zeroing in on one.

Below are cons of daycare FSA:

  • To receive a reimbursement from the DCFSA, you will have to provide all necessary details (primarily, how you spent your money) to the administrator. This could just be extra work for you, but it is mostly worth it. Also, administrators are known to be helpful in this sense. When approached right, they’re sure to help you meet the substantiation requirements.
  • You need to use all the money that you’re qualified for in your dependent care FSA limit in the given year. Or you will lose out. There are no rollovers when it comes to DCFSAs. This way, they are different from health FSAs which typically transfer your leftover cash to the forthcoming year. But, hear us out: records show that most people use all their money in the Dependent Care FSA and don’t forfeit any funds- this is because employees can anticipate their dependent care expenses at the year beginning when they make their salary reduction thing. You have to do the math.
  • Normally most employers have a limited enrollment period for signing up for a DCFSA- if you don’t then you’re out of luck unless there is family structure change like marriage, birth, or adoption.
  • And finally, there is the thing (obvious here)- when you lose your job, you automatically lose the benefits.

How Much Parents Can Save From FSA Dependent Care Plan?

While restrictive provisions like the “use it or lose it” (or yes, those we outlined above) keep DCFSAs from being mainstream, it can be an important tax planning tool to parents like you. Like already mentioned, you save 30 per cent on dependent care on average while you are at work. These cafeteria plan dollars (your contribution election amount) will be divided by the number of months remaining between the qualifying date (a receipt of your enrollment form) and the remaining months of the plan per year.

mom opening an FSA account

What to Choose? Dependent Care FSA Or Child Care Tax Credit

Two strategies that you’re bound to weigh in on are Dependent Care FSA (after knowing the whole deal)  and Child Care Tax Credit. You must comprehend the exact differences between these two, and we have here outlined them for you:

The same expenses qualify in both cases. However, they are fundamentally different. The DCFSA allows expenses to be deducted from your taxable income, on the other hand, Child Care Tax Credit is a percentage of the expense and decreases as your income goes up. In this case, the credit starts at 35% for income up to $15,000 but drops down to just 20% of your income is above $43,000. Also, take into account the fact that the Child Care Tax Credit caps eligible expenses at $3000 for one dependent and just $6000 for two or more- this is up to a maximum of the full earnings of you or your partner. Regardless of how much you pay, that’s all you get.

Now, as you figure out your tax planning strategy, remember to deduct any financial help your employer is already providing you before calculating the credit. Calculate your total child care expenses that shall amount to each year and factor in the benefits you get using each of these two vehicles of credit: How can you maximise your tax savings?

Each family plans for the financial stress of having a child in their own, distinctive way- after all you know your needs and circumstances more than anybody else! You could be a parent that chooses to stay home full time with your kids that aren’t at school yet (this is shown to cost less than the dual-income household which pays for full-time daycare) or be looking for other low-cost solutions like having mum (or a favourite aunt) look over your child. N matter what you are, it’s imperative that you get your taxes sorted out. And setting up a dependent care FSA at work should help you manage significant expenses and give your little one or adored parent all the love they need.

Also Read:

At What Age Can Your Kid Go to a Daycare/Childcare Centre?
How to Ensure Your Kids Gets Adequate Nutrition When in Day Care
Daycare Centre for Children

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Gauri Ratnam completed her Masters in English Literature from the University of Pune. She began her journey as a German translator soon after completing her graduation, but later moved on to pursue her passion for writing. Having written for both digital and print media in a varied range of industries, she has the ability to write relatable and well-researched content, benefical for anyone seeking advice or direction.