You can put pre-tax money into a dependent care flexible spending account (DCFSA) to pay for certain caregiving expenses.
Only specific costs that directly support professional caregiving services that enable you to work, look for work, or enroll in full-time education are eligible for reimbursement.
The amount you can put toward a DCFSA each year is capped.
Usage-it-or-lose-it policy for DCFSA money means that unused monies at the end of the year do not carry over for use the following year.
The cost of child care and other dependent care bills can quickly mount for many Americans. Fortunately, there are strategies to lower your tax liabilities in order to balance these expenses. One method for doing such is the dependent care flexible spending account (DCFSA).
What Is an FSA for Dependent Care?
An employer-provided, tax-advantaged account for specific dependent care expenses is known as a dependent care flexible spending account (DCFSA). Its objective is to assist in defraying the costs of professional caregiving so that the caregiver can pursue full-time employment, job search, or academic endeavors.
An employee may choose to donate a percentage of their pay pre-tax during the company’s open enrollment period or another qualifying event. According to Pauline Roteta, founder and CEO of Pasito, a benefits enrollment software company, this can save money for both companies and employees, she told the Balance in an email interview.
Because the DCFSAs are paid for with pre-tax payroll funds, employers save money. Accordingly, the employer is exempt from paying Social Security or Medicare taxes on the money that employees contribute to those accounts.
A Dependent Care Assistance Program is another name for a dependent care flexible spending account (DCAP). Contrast it with a health care flexible spending account, which is used to pay for a person’s admissible medical costs.
Opening a DCFSA can be advantageous for a variety of employees. You might be eligible if you care for an elderly or disabled dependent, have a child under the age of 13, or both. Roteta asserts that it’s critical to have a licensed expert confirm your eligibility.
The Functions of a Dependent Care FSA
Dependency support Your employer sets up your FSAs. Each pay month, you choose how much money you wish to put into the account. The money is then automatically taken out of your paycheck and deposited prior to tax withholding.
You could receive contributions from your workplace as well. To learn if your employer offers this benefit, get in touch with your human resources department.
Depending on your situation, you might be able to pay your dependent care provider directly, or you might need to pay for qualifying costs up front before being reimbursed.
You must submit a claim form issued by your employer along with the required paperwork, which includes an itemized receipt for the expense and evidence that you already paid it, if you pay for charges up front before getting reimbursed.
To be eligible for reimbursement, be sure to have the following:
- your signature, address, and name
- Dates of the service you want to be compensated for’s start and end
- Name and connection of your dependent to you
- Service description, service provider name, and requested reimbursement amount
Note: For DCFSA claims, canceled checks, non-itemized cash register receipts, or credit card receipts will not be accepted as proof of purchase.
A dependent care FSA is not available to everybody. The age of the dependant, your relationship to that individual, and the kinds of expenses incurred are a few variables that may affect eligibility.
Finding out whether the dependant in question is regarded as a qualifying individual by the IRS is the first step in figuring out whether you qualify for a dependent care FSA.
If the dependent fits into any of the following descriptions, you should be eligible:
- Your lawful tax dependent child who was under the age of 13 when the care was provided is a qualifying child.
Spouse: A spouse who lives with you for more than half the year and is either physically or psychologically unable to take care of themselves.
- Another dependent: a person who lived with you for more than half the year, was physically or mentally unable to care for themselves, and was either your dependent or would have been your legal dependent but for the following reasons:
- They had a gross income of at least $4,300.
- They made a joint tax filing.
- You or your spouse (if you’re filing jointly) may be included as a dependent on the yearly tax return of another person4.
The IRS provides specific guidelines for who is eligible to use a dependent care FSA to pay for care-related expenses if you are divorced or separated.
A dependent care FSA cannot be used to pay for all costs. The important thing is that the money from the account is used to pay for care-related expenses that enable you to work, look for work, or go to school. Examples of acceptable services are:
- After-school and pre-school services (but not tuition)
- Nannies, au pairs, and babysitters
- Adult daycare services
- Costs for late pick-up
- Authorized daycare facilities
- Preschools or nursery schools
- Placement costs for a caregiver for dependents
- Camp days
The following are some instances of expenses that your DCFSA might not be able to reimburse you for:
- Payment in advance for services that have not yet been rendered
educational costs like tuition, summer classes, or tutoring
- Food, accommodation, clothing, entertainment, or education (unless payments made for these things are incidental to the cost of care and cannot be separated from it).
- Costs for late payments
- Health care
- Nighttime camping
- Enrollment fees
- Transportation costs not associated with going to or from the
- Location of care
Limits on Contributions
The amount of money you can contribute to a DCFSA each year is restricted by the IRS. Before the outbreak, the annual contribution cap for single filers and married couples filing jointly was $5,000.
The American Rescue Plan allowed dependent care FSA contributions of up to $10,500 for single filers, married couples filing jointly, and married couples filing separately in 2021, and a maximum of $5,250 for married couples filing separately. Employers have the option of adopting or rejecting the raise. The cap will return to $5,000 for 2022 and after.
If you are married filing jointly or a single filer, you will be allowed to make contributions of up to $5,000 per year for your plan years in 2022 and 2023. If you’re married and filing separately, you can make an annual contribution of up to $2,500.
You Don’t Roll Over Your Money
In contrast to a health savings account, a DCFSA often does not carry over unused funds to the following year. In order to use up your funds before they expire, your company might grant you a grace period of 2.5 months into the new year.
For plan years ending in 2020 and 2021, there is an exemption because COVID-19 relief provisions allow companies to let account holders to roll over their unused funds into the following year, which would be 2021 and 2022, respectively.
Child Care Tax Credit vs. Dependent Care FSA
The child and dependent care tax credit is an additional way for you to reduce your taxable income and save money on dependent care costs. As with a DCFSA, there are partial exclusions for people with disabilities and full-time students, and the credit only applies to costs that are required for you to work.
The credit for child and dependent care has a $2,100 maximum deduction amount.
|MAXIMUM CREDIT AMOUNT, 2023|
|One Dependent||35% of $3,000 ($1,050)|
|Two or More Dependents||35% of 6,000 ($2,100)|
For families without access to a dependent care FSA or those with lower adjusted gross incomes, the child and dependent care tax credit can be a useful choice. If you choose to use the tax credit instead of a DCFSA, there is no risk of financial loss. A DCFSA may offer more significant savings for families with greater incomes.
If you have two dependents or more, you can contribute $5,000 to a DCFSA and still be eligible for a $1,000 tax credit for unreimbursed expenses.
According to the American Rescue Plan Act, taxpayers can now receive up to $4,000 for one qualified individual and $8,000 for two or more. For 2021, it was also possibly refundable, so you might not have to owe taxes in order to receive it.
Using an FSA for Dependent Care for Aging Parents
Although many people who receive DCFSAs use their income to pay for child care, it can also assist with the cost of taking care of an aging parent or another dependent.
You must fulfill a few requirements. First, you must have spent more than half the year living at home with your parent. You can also list them as a dependant on your tax return, or you would be allowed to if they had a gross income of at least $4,300, filed a joint return, or you or your spouse (if you’re married and filing jointly) could be listed as a dependent on someone else’s yearly tax return.
Your parent must not be able to take care of themselves. Finally, the costs you incurred must be directly tied to supporting your full-time attendance at school, employment search, or both.
When to Join an FSA for Dependent Care
Employees often aren’t permitted to set up or modify their DCFSA plans outside of the company-wide enrollment period unless they have a qualifying event (like getting married or having a child) during open enrollment.
Questions and Answers (FAQs)
What amount should I contribute to a dependent care FSA?
Budget carefully if you take part in a DCFSA to avoid overpaying and ending yourself in the red at year’s end. You should sum up the amount of money you’ve spent on dependent care from the last few years’ worth of bank and credit card bills. Make an estimate based on that amount. Remember that you are only permitted to contribute up to the annual maximum. The annual maximum for single people and married couples filing jointly in 2022 and 2023 is $5,000. The annual maximum for married couples filing separately is $2,500. 6
Who is eligible for a dependent care FSA?
A dependent care FSA is only available to a certain group of people. You must fulfill the requirements listed below in order to enroll:
You and your spouse are both employed or seeking employment (unless your spouse has a disability that prevents them from working, or attends school full-time.)
- This plan is provided by your employer.
- The IRS defines your dependent as an eligible individual.
- You spent the required money.
Which should I choose: the child care tax credit or an FSA?
Depending on your financial situation and care requirements, you should decide whether to use an FSA or the child care tax credit. It’s not always an either-or choice, though. If you don’t double-dip, you can frequently use both. For instance, if you contribute the maximum amount to a DCFSA and you have additional expenses, you might be able to claim the additional expenses on your taxes in order to qualify for the credit.