Is a Dependent Care FSA Right for You
A Dependent Care Flexible Spending Account (DC-FSA) benefit allows you to set aside money on a pre-tax basis for future expenses related to childcare and/or eldercare for an eligible dependent (i.e. any child under the age of 13 or any dependent who is incapable of caring for him- or herself, whom you can claim on your tax return, and who spends at least eight hours a day in your home).
Setting aside money on a pre-tax basis reduces your total taxable income, which results in you paying less in taxes overall. In addition, DC-FSAs are also free from the 7.65% Social Security and Medicare Tax and, in most cases, state taxes as well.
Eligible expenses for DC-FSAs include:
In-home babysitting services
Care of a preschool child – care must be by a licensed nursery or day care provider
Before- and after-school care
Day camp
In-home dependent day care
To be reimbursed, certain criteria are required for those who are providing child/dependent care:
Start and end dates for the service you want reimbursed
Your dependent’s name and relationship to you
Description of the service provided and name of the service provider, as well as their tax ID
You can have both a Healthcare FSA (HC-FSA) and a DC-FSAs at the same time, as these accounts are used for completely different and separate expenses. Healthcare FSA’s are for eligible health care expenses (i.e. medical, dental, vision, etc.) for you and your eligible tax dependents.
For 2024, the DC-FSA maximum annual amount is $5,000 for single individuals and married couples filing jointly and $2,500 for married individuals filing separately (although that may increase for 2025). Money contributed to the DC-FSA account is on a “use-it or lose-it” basis, which means that any funds that remain at the end of the plan year will be forfeited, except for claims incurred late in the plan year or during the Grace Period.
There is one important piece of information to consider: There is no “double dipping” allowed. That means you are not permitted to have a DC-FSA and take the Dependent Care Tax Credit at the end of the year. However, if you contribute the maximum allowed to your DC-FSA and you incur more expenses beyond the maximum, you may be able to claim the difference on your taxes to receive the credit. Speak with a tax advisor to determine what option is best for you and your family.
To find out more information on if a Dependent Care Flexible Spending Account is the right financial decision for you and your family, click here or visit the IRS Publication 503. There is also a great video from our FSA administrator, WEX: Learn about dependent care flexible spending accounts (dependent care FSAs) for your open enrollment (screencast.com).