Episode 118

How to Save Taxes by Using a Dependent Care FSA

 

Childcare is one of the biggest expense for some families. Tune in to learn how to take advantage of the pre-tax benefits of a Dependent Care Flexible Spending Account.

What is a Dependent Care FSA & Who Qualifies?

You might already be familiar with an FSA which is a flexible spending account for healthcare expenses. A lot of employers offer an FSA for you to put money pre-tax in to the account that you can then use for co-pays and other health care related needs. A Dependent Care FSA is a flexible spending account that some employers offer for you to open up and fund the account with pre-tax dollars to pay for your dependent care needs. The difference is unlike your FSA for healthcare that is pre-funded by the employer, with a Dependent Care FSA you are funding the account yourself with pre-tax dollars and can only use the money you put in. The maximum care amount for 2022 is $5,000 per year ($2,500 if married filing separately). Dependents that qualify for the Dependent Care FSA are children under the age of 13 or an adult dependent that is disabled or elderly.

Who Can Use the Dependent Care FSA & What Can I Use It On?

If your employer offers a Dependent Care FSA you can take advantage of this as long as both spouses are employed. For example, if one spouse works, but the other spouse is a stay at home parent, then you would not be eligible to have a Dependent Care FSA. You can use the funds on before and after school care, au pairs, a qualified caregiver, or adult day care program or summer day camp. This cannot be used to pay for private school tuition, overnight summer camps, vacations or date nights. The Dependent Care FSA is only to be used for care while you are at work, looking for work, or attending school full-time.

If I Do Not Use the Funds, What Happens To Them?

The Dependent Care FSA is similar to health FSA with the use it or lose it features. What this means is the funds will expire if they are not used by the end of the year. We all know childcare is expensive so you probably won’t have any funds left over. However, there is a grace period which is typically 90 days after the end of the year to then apply for reimbursement. 

How Will This Affect My Taxes?

You cannot double dip the benefits, however the law says it is okay to use both. You could in fact put pre-tax dollars up to the $5,000 household limit into this account and reimburse yourself tax free. You can also use the Child and Dependent Care Tax Credit when you go to file your taxes if you qualify. The tax benefits received from the dependent care are going to reduce the amount of the tax credit you are eligible for because you are not allowed to use the same expenses for both. I recommend speaking with your tax accountant to make sure you are maximizing these benefits. 

Key Takeaways

Not every employer offers a Dependent Care FSA, so check with your employer first and see if you can enroll for this benefit during open enrollment. FSA’s are usually pre-funded by the employer, but Dependent Care FSA’s are actually funds that you have to put in yourself. Dependents don’t have to be children. Spouses and family members that are disabled or elderly can be dependents. You can use these funds on daycare, qualified caregivers and au pairs so long as both parents are working or if one parent is working and the other is actively pursuing work or attending school full-time. Dependent Care FSA’s are sponsored through employers, so if you are self-employed this isn’t an option you are able to take advantage of, unless you’re married to someone who is offered one via their employer. 

Notes:

In this episode, Luis speaks about the following and more:

  • What is a Dependent Care FSA?
  • Eligible Expenses
  • Dollar limitations
  • Coupling Dependent Care FSAs with other pre-tax benefits to maximize your tax savings

Resources: