Do you have a kid under 13? Do you pay someone to watch them so you (and your spouse) can work? You may be eligible for a Dependent Care Flexible Spending Account (this is separate from your Healthcare Flexible Spending Account ).
Childcare is a huge drain on many families’ budget but few families seem to know about or take advantage of this employee benefit. In this post we will go over the who, what, why, and how of Dependent Care Flexible Spending Accounts so you can make the best decision for your family and possibly save some serious money.
What is a Dependent Care Flexible Spending Account?
OK, first, Dependent Care Flexible Savings Account is way too long to write over and over again in this article so for I’m going to refer to it as a DSA.
A DSA allows working families to set aside money pre-tax to pay for qualified childcare expenses directly from their paycheck. Here are some examples of expenses that are allowed:
Some examples of expenses that are not allowed:
Associated meals or snacks
You can actually use a DSA to pay for eldercare expenses (such as an adult day center) as well. Wageworks has put together a checklist that is way more user-friendly than the IRS website. Check it out to see if your expenses could be eligible.
Unfortunately, you cannot roll money over from one year to the next in your DSA. Ask your child care providers about fees for the upcoming year, whip out your calculator and estimate how much you will spend during your plan year. Remember that your expenses may change at the start of the new school year.
How much can I save in a Dependent Care Flexible Spending Account?
In 2018 if you file your taxes as single or married filing jointly then you can save up to $5,000 in a DSA. If you are married filing separately you can save $2,500 in an FSA. For simplicity’s sake, if you and your spouse both have a DSA option available at work don’t contribute to both. The IRS will not allow you to use more than $5,000 a year from a DSA and anything you have left over will be forfeited to your employer. Not good. Make your life easier and choose just one account for your contributions.
Why use a Dependent Care Flexible Savings Account?
Pre-tax savings = good. Families can use DSAs to save money on childcare expenses by having their income deducted automatically from their paycheck before any taxes are paid on that income. Money set aside in a DSA can be used to pay for qualified child care expenses tax free. Said another way, without a DSA you would first pay taxes on the money then use that money to pay for child care.
The higher your income the more money you save. This calculator can give you an idea of how much you could save by paying for qualified child care expenses with pre-tax money.
Who can use a Dependent Care Flexible Savings Account?
Not everyone can automatically use a DSA. According to the IRS you can use a DSA if the following tests are met:
- Qualifying person test - a dependent under age 13 or an adult relative or spouse who is incapable of self-care
- Your qualified child care expenses were incurred so you (and your spouse) could work, look for work or attend school full-time.
- You must identify your daycare provider with a Tax Identification Number
- You cannot pay a dependent you claim on your tax return to watch your dependent
- You can’t pay your spouse or the parent of your kid to watch your kid
Here are a couple of examples to break through some of the more confusing legalese from the IRS website:
Ex. 1: You send your (under age 13) child to a licensed daycare provider or preschool while you work. The provider gives you their tax identification number. You submit the tax id with an original receipt to your benefits administrator. That should work.
Ex. 2: Your cousin watches your kids on the side and won’t give you her Social Security number or Tax Identification number- that expense won’t qualify. (no Tax Id Number)
Ex. 3: If your son is home from college (and you still claim him as a dependent on your tax return) you cannot pay him to run a “survival summer camp” for the kids while you work. (you can’t pay your dependent)
Ex. 4: Your new/third wife runs an in-home daycare and you pay her to watch your children. Not gonna fly. (Can’t pay your spouse)
- You have to have a Tax Identification Number for your child care provider.
- Keep your receipts and records!
- It's best to submit your expenses for reimbursement as soon as you pay them.
- Use it or lose it. Carefully estimate your dependent care expenses, any money left-over in the account will be forfeited to your employer.
- You may have a grace period to file claims. For example, CarMax, a large local employer here in Richmond, VA gives employees 90 days after the end of the plan year to file their claims for expenses that were incurred during the plan year. Review your plan documents or ask HR.
Are you going through open enrollment at work? I've got you covered: How to Make the Most of Your Employee Benefits
Has your employer offered you an HSA or FSA at work but you aren't sure if you should use one? Try: Can An HSA Or FSA Save You Money?
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This is general financial planning advice and is not tax advice. Check with your CPA or tax preparer before you make any decisions.