If you’re a parent with children in daycare, you know firsthand the major expense that childcare can be. According to a survey done by Care.com, 72% of families report spending more than 10% of their income on childcare expenses and 55% of families report spending more than $10,000 on childcare per year.1
Here’s some good news: there’s an account called a Dependent Care Flexible Spending Account (FSA) that can help you decrease your taxable income when paying for childcare expenses. Now, I know what you’re thinking – the FSA helps me save on my medical expenses. And you’re right! There are TWO types of Flexible Spending Accounts (FSAs), and you can have one or both of them at the same time. Let’s break this down a little bit.
- Medical Flexible Spending Account (FSA): An account that can be used alongside your health plan to pay for medical expenses tax-free
- Dependent Care Flexible Spending Account (FSA): An account that allows you to contribute pre-tax dollars for childcare expenses
So how much money can the Dependent Care FSA save you? For a family in the 24% federal tax bracket, it could mean you save $240 in federal taxes for every $1,000 spent on childcare.2
Here are 5 big things to know about the Dependent Care FSA:
- There’s a contribution limit of $5,000 per year. For families with children in daycare full-time, this likely won’t fully cover your expenses but every little bit helps.
- A variety of types of childcare qualify as eligible expenses. The following services are all deemed eligible for reimbursement using the Dependent Care FSA.
- Daycare centers
- Nanny
- Preschool
- Babysitter (as long as they’re allowing a parent to work, not for recreational reasons)
- Before and after school care
- Summer day camps (not overnight camps)
- It’s administered by your employer. Unfortunately, if you’re self-employed or your employer doesn’t offer one, you aren’t able to participate.
- You have to use it or lose it. You can set up automatic contributions to your Dependent Care FSA to come from each paycheck. Once you’ve paid for the childcare service, you can submit for reimbursement. Just make sure to submit for reimbursement before your Plan Year (not calendar year!) ends so you don’t lose those unused funds.
- You have to sign up during Open Enrollment or after a life change. You can only enroll or make changes to your Dependent Care FSA during your company’s Open Enrollment period or after a life status change. A life status change would include having a baby or a change in you or your spouse’s employment status (e.g. transitioning from part-time to full-time).
You might be wondering how the rules of the Dependent Care FSA have been impacted by Covid-19, considering that childcare, schooling, and jobs have all shifted drastically during the last seven months. If you already have a Dependent Care FSA, make sure to check with your administrator. The IRS has issued additional guidelines that would allow you to add or remove a Dependent Care FSA, or increase or decrease your contributions outside of the Open Enrollment or life status change regulations due to the unprecedented nature of the Coronavirus.3
If your employer doesn’t offer a Dependent Care FSA, it doesn’t hurt to ask for one! It’s a low-cost benefit for the employer and can add wonderful value for employees. My previous employer didn’t offer one, and when I asked, they decided to add it to their benefits offering. It can’t hurt!
Ginny Latham has been helping employees understand and maximize their benefits for over 7 years. In her free time, she enjoys chasing her one year old around the house, finding bargain deals, and trying to master modern calligraphy.
1 Care.com, “Child care costs more in 2020, and the pandemic has parents scrambling for solutions”. https://www.care.com/c/stories/2423/how-much-does-child-care-cost/. Accessed 28 September 2020
2 Investopedia, “Benefits of a Dependent Care Flexible Spending Account”. https://www.investopedia.com/articles/pf/09/dependent-care-fsa.asp. Accessed 28 September 2020
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