During benefits enrollment, you can elect to save pre-tax dollars from your paycheck in a Dependent Care Flexible Spending Account (FSA).
The dependent child and/or adult care spending account lets you reimburse yourself with tax-free dollars for day care expenses for a dependent child or adult, including expenses for day care services provided by a qualified caregiver for day care provided in your home, someone else’s home or a day care center. You and your spouse (if you’re married) must both be working to participate in this account, unless your spouse is a full-time student or totally disabled.
Eligible dependents include your children under age 13 whom you claim on your federal income tax return or a dependent adult who is not capable of self-care and spends at least eight hours a day in your home.
Reimbursement from your Dependent Care FSA
To receive reimbursement from your dependent care spending account, your request must include the care provider’s Taxpayer Identification Number (TIN), unless your provider is a tax-exempt organization (e.g., a church or a synagogue). For individual providers, the TIN is usually that person’s Social Security number. If the person works in your home, you are responsible for filing an employer’s return with the IRS and for paying Social Security tax on wages paid to that employee. The care provider cannot be your dependent or your child under age 19.
While considering participation in the Dependent Care Account, it is important to compare these savings and those you accrue through the Earned Income Tax Credit.
- Minimum $5.00 per week
- Maximum $5,000 per year*
* If you are married and your spouse also has a dependent care spending account, your combined contribution limit is $5,000 a year. If you are married and file a separate tax return, your maximum annual contribution is $2,500. In addition, if you are married, you cannot contribute more than the lower of your or your spouse’s annual salary. For example, if your spouse works part-time and earns $4,000 per year, you cannot contribute more than $4,000 to your account. If your spouse is disabled or a full-time student for at least five months of the year, your spouse is treated as having a monthly income of $250 (if you have one eligible dependent) or $500 (if you have two or more eligible dependents).
Should I Use the Dependent Child Spending Account or Take the Federal Tax Credit?
When you file your annual income tax return, the IRS and some states allow a tax credit for the same kind of expenses that qualify for the dependent care spending account. If you choose to take a federal tax credit, you pay your expenses with after-tax dollars and then claim the childcare credit on your tax return at the end of the year.
There is a limit on the expenses you can use toward the tax credit. That limit is $3,000 for one dependent and $6,000 for two or more dependents. However, only 20%-35% of these expenses may be claimed, depending on your adjusted gross income. Any dependent care expenses reimbursed through the dependent care spending account will offset the amount you may claim as a tax credit, dollar for dollar. Your tax savings will vary, depending on whether you claim the childcare credit or use the dependent care spending account. Of course, each situation is different, and you will have to determine which approach is best for you. You should check with your tax advisor if you have questions or need further information.