Dependent Care FSA account is not as popular as the primary FSA account. Many people take advantage of FSA account for their tax benefit but most fail to take advantage of tax benefit from Dependent Care FSA account. Dependent Care FSA account work similar to popular FSA account where you allocate pre-tax portion of your paycheck to cover dependent care expenses. Properly planning for Dependent Care FSA account can help save money from paying extra taxes and can use that money for other purposes. IRS allows a family to allocate up to maximum of $5,000 every year. Because the allocation is pre-tax, the deduction from paycheck occurs before any taxes including social security tax. You can save more than 40% of your allocation depending on which state you live in (some states have no state tax)!
Not Everyone Qualifies for Dependent Care FSA Account:
Unfortunately, not everyone with children can take advantage of Dependent Care FSA account. If you have children in day care, after school care, or summer camp because you and your spouse are working, then Dependent Care FSA is for you! But for childcare cost, the tuition must be greater than $500 per year. You would be a fool if you choose not to sign up for Dependent Care FSA account because the tax savings can literally be more than $2000 for those that maximize the limit.
Tax Category For Singles For Married Couple
Federal 15% 28%
State 0 – 8% 0 – 8%
FICA 6.2% 6.2%
Medicare 1.45% 1.45%
Total 22.45% – 30.45% 35.65% – 43.65%
Important Rules for Dependent Care FSA Account
- Your children under age 13.
- Dependents of any age who are mentally or physically incapable of caring for themselves, and whom you claim as a dependent on your federal income tax return
- An adult may qualify as your dependent if you provide more than half that person’s maintenance costs during the year
- If your spouse is a stay-at-home mom or dad, you cannot participate in Dependent care FSA account
Eligible expenses include:
- Fees for licensed day care or adult care facilities
- Amounts paid for services (including babysitters or nursery school)
- Placement fees for a dependent care provider, such as an au pair
- Summer day camp for children under age 13
- Before and after school care programs for dependents under age 13
- Payment to a relative (age 19 or older who is not your dependent) who cares for your qualified dependent
- Payment to a housekeeper whose duties also include dependent day care
I personally find the last two eligible expenses interesting. If you have a parent who is willing to take care of your children while you are at work, then this qualifies for Dependent Care FSA. I know there are many people who are in this situation but I wonder how many actually have set up a FSA account and contribute $5000.
These are the expenses that are NOT eligible for Dependent Care FSA:
- Baby-sitter while you are home and not working
- Food, clothing, and entertainment related purchases
- Child support payments
- Activity fees and educational supplies
- Overnight camp costs
- Any late payment fees