About Your Dependent Care FSA
A dependent care FSA may be a great choice for many parents with dependent children or adults helping to care for their elderly parents. Most commonly associated with expenses for children, but also used if you have a disabled parent or partner who requires continual care so that you can leave the home and work, Dependent Care FSA can be used to get tax advantages that help you save money on the cost of that care. If you’re married, your spouse must also be employed, and the care must also be in the service of helping him or her be able to work – i.e. one of you cannot work night while the other works days. The exceptions are that if your spouse is not the person for whom you are getting the dependent care account but is also disabled, or is a full-time student then you can still qualify.
The maximum amount that you can put aside tax-free from your pay depends for a Dependent Care FSA on those limits set by the government. There are different Dependent Care FSA limits for the following groups of earners:
– Single and filing as head of household
– Married and file a joint tax returns
– Married and filing separate returns
– Highly compensated
– Your spouse is compensated at a low amount
– Your spouse is disabled or a full-time student
If you fall into one of those categories you should check with both your tax advisor and Dependent Care FSA plan administrator to be sure that it makes sense for you to sign up, and what the rules might be once you do.
Investopedia covers Dependent Care Flexible Spending as well.
Dependent Care FSA eligible expenses:
Your Dependent Care FSA has certain eligibility rules, including the fact that dependents must be under age 13 or be physically or mentally disabled. In addition, in cases of dual custody, they must be depending on that household for more than half of their day-to-day support. Also, the person receiving the care if its someone age 13 or over must e spending at least eight hours each day in the home (as opposed to having been placed in 24 hour care). Finally, any services provided cannot be done by a person you or your spouse also claims as a dependent, or by another child of yours under the age of nineteen. While there cases may be rare, they can be commonly confused by those signing up for a Dependent Care FSA for the first time.
There are some requirements of those who are providing the care as part of your Dependent Care FSA. For example, day care centers must comply with many state and local laws and regulations. When you submit the taxpayer identification number of the care providers you use it is possible that the government agencies involved will check on this. This does not mean you cannot use a less formal care provider for your Dependent Care FSA, even including nannies and babysitters, but you will still have to submit some basic information about these care providers.
In most cases the eligible expenses for your dependent care flexible spending account are obvious, and again if your need the care during a time you are working (and in the case of a couple when you both are working) then there is a good chance it is deductible. Most of the time the following are eligible expenses for a dependent care flexible spending account:
1. After school care that is during your work time
2. Before school care that allows you to get to work on time
3. Day camps that take place during the work day
4. A babysitter that provides care during your work day
5. The specific cost of an au pair realted to your work day
6. Group day care programs
There may be other places that are covered as eligible expenses for your dependent care FSA, but it is worth making sure – always check with your plan administrator if it is not clear.
Is a Dependent Care FSA for You?
If you do not take out a Dependent Care FSA you may still be eligible for a federal tax credit up to a certain amount for these same expenses. For many and perhaps most, the benefits of a Dependent Care FSA are better than the regular tax benefits, but that is not always the case. We cannot give you advice about your own unique tax situation because many factors may be involved with which choice is right for you. We can say that usually the tax credit is better at lower incomes, while the Dependent Care FSA does better at moderate to higher incomes. The reason is that the credit is actually just a portion of the eligible expenses, and the percentage you can deduct decreases as your income increases. Thus when it decreases to the point that having that income just removed tax-free is a better choice, you are better off with the Dependent Care FSA – again, in most cases but not all.
What expenses are not eligible in a Dependent Care FSA?
It is absolutely vital to know what expenses are eligible and which ones are ineligible if you are choosing a Dependent Care FSA. If you are at all unsure, you should check with you company’s benefit administrator ahead of time, but here are some examples of ineligible expenses:
– Expenses of any kind if you and your spouse are not separated and one of you does not work, is not disabled, and is not a full-time student. In other words, even if one parent works, if the other one is in the children’s’ primary household and does not work during the hours that care is provided, technically a dependent care FSA cannot be used.
– Expenses for a child 13 years or over who is not disabled are not eligible for a Dependent Care FSA, and you should check with your plan administrator if your child will turn 13 during the plan year to check what that means.
– Expenses that are incurred at times that are not related to you having to have the care so you can work
There are also some types of expenses that are more complicated or more difficult to determine regarding your Dependent Care FSA, such as:
– Care provided by family members
– Babysitting and other care provided by less formal providers
– Summer Camps are usually not eligible as part of your Dependent Care FSA unless they are day camps
If any of these three types of care are those for which you will be claiming money from your Dependent Care FSA, you should read the plan specifics carefully and ask your benefit administrator about your situation.
The Use it or Lose it Rule
One thing you must make sure when you take out a Dependent Care FSA is that you will use all the money you elect to out aside. You cannot change that election part of the way through the plan year, and if you do not use up all the money on qualified expenses, you will not recover the money. Pay attention to the Dependent Care FSA rules noted in the previous section, because if you make a mistake with regard to those rules about eligible expenses, you could end up not spending out what you have put aside. There are some exceptions regarding a change in your or your partner’s work, leaves of absence, and other changes but you should check with your plan administrator if any of these will be happening. A very few plans will allow you to spend some money into the next plan year, but this is increasingly rare. Bottom line: if you do not spend your dependent care FSA out over the plan year, you may very well lose money. For most people who work full-time and use a dependent care flexible spending account for after school care that lasts all school year this may not be a problem, but for those whose needs are more intermittent, you may need to make sure you do the math accurately as far as how much to put aside.
A Dependent care FSA may be an excellent way for you to save money by getting some of your pay tax-free. For a wide variety of people, a dependent care FSA can be used easily given that care for dependents is obviously eligible and most tax situations create the opportunity for savings. That said, you do need to make sure that all of the expenses you intent to use for your dependent care flexible spending account are in fact eligible, and you also need to make sure you get any required documentation from your providers of this fact. In addition, you should make sure that you pay attention to any factors that might affect you, such as a tax situation where you and your partner are filing separately. In summary, make sure you know your dependent care FSA plan very well and follow al the guidelines.
Best of luck with your choice and feel free to use the comments section to ask questions or give others advice about your dependent care FSA.