Flexible Spending Account – Dependent Care Account
What is a Dependent Care FSA?
A Dependent Care FSA is an employer-sponsored, pre-tax account. You set up automatic deductions from your paychecks that are contributed to this account and are eligible to use those funds for qualifying child care expenses. The current maximum contribution is $5,000 per year for each household. So, even if both you and your spouse have a Dependent Care FSA available through your individual employers, you can only contribute $5,000 total to one or across both accounts.
Potential benefits of a Dependent Care FSA
- Your Dependent Care FSA is funded with pre-tax dollars. Much like a workplace retirement plan, this helps to reduce your total taxable income, meaning you may pay less overall taxes as a result.
- Dependent Care FSAs are also sheltered from the 7.65% Social Security and Medicare tax.
- In most cases, Dependent Care FSAs are sheltered from state taxes, as well.
An example of your tax savings would be: If you contribute the maximum $5,000 in a given year, and fall into the 24% tax bracket, you’d be saving about $1,583 a year in taxes including both federal income tax and the 7.65% Social Security and Medicare tax.
Potential drawbacks of a Dependent Care FSA
While Dependent Care FSAs have some obvious positives, there are a few drawbacks.
- FSAs are use-it-or-lose-it accounts. The funds you contribute don’t roll over from year to year. If you and your partner’s child care plans change, then you may be out that money.
- Not all employers offer Dependent Care FSA options.
- You’ll need to make sure all of your expenses qualify. This means tracking receipts, reimbursements, and other qualifying costs associated with your child care and making sure that all child care services you use are eligible for the funds in a Dependent Care FSA. For example, the cost of babysitters hired for care unrelated to your employer may not be qualified expenses for reimbursement.
Because FSAs don’t offer a year-to-year rollover, you’ll need to carefully budget for the amount of qualifying child care related expenses you actually have (although it’s not hard to get to the $5,000 limit these days). If you over contribute to the account and don’t use the full amount of funds, you’ll lose that money at the end of the year.
(source : https://havenlife.com/blog/fsa-or-tax-credit-how-you-can-save-on-child-care/)