Our open enrollment is taking place right now for employee benefits. For the first time ever, I looked into starting a Dependent Care Flexible Savings Account (FSA). I’ve always heard that having an FSA is like getting an average 20 to 40% discount on dependent care costs. Since our son is now in daycare, it’s the perfect time for me to sign up.
The way that a dependent care FSA works is that you set aside pretax money for child care costs you anticipate for the upcoming year. Since the money is set aside from your paycheck before taxes, you can save 20% to 40% on childcare expenses. You won’t have to pay any federal taxes, social security, Medicare, or state taxes on this amount. The FSA also reduces your adjusted gross income (AGI).
In order to have a dependent care FSA, you and your spouse both need to be gainfully employed. The FSA is intended to help people who are working and have dependent care costs that enable you to work. Your dependent can be any child under 13, a disabled spouse, elderly parent, or any other dependent that is unable to take care for themselves (due to mental or physical disability). If your spouse is a stay at home parent, you cannot participate in a Dependent Care FSA. If one parent attends school full time, it is an exception.
Married couples (like us) can elect a maximum of $5,000 annually, whether separately or jointly. The annual election is front-loaded on January 1st, so we will have full access to the $5,000 immediately and then we will just “pay it off” throughout the year through payroll contributions. Daycare expenses can then be paid either with your FSA debit card or you can submit for reimbursement online and get a direct deposit in your bank account.
One downside of the Dependent Care FSA is that the IRS only allows a maximum of $5,000 a year for individuals or married couples filing jointly. Even if each parent has access to a separate FSA through their employer. Another downside of the Dependent Care FSA is that there is no roll over of unused FSA funds. Any unused funds are forfeited by the end of the year. I know that daycare expenses for our son will definitely exceed $5,000, so I’m not worried about leaving any funds unused.
In the future, our Dependent Care FSA funds can be used for summer day camp, before and after school care programs, and even payment to a relative age 19 or older that cares for our son. I never thought I’d be so excited to save money on taxes; I guess I’m a real adult now. Then again, saving over $1,000 a year on daycare costs is a nice break.