Dependent Care FSA

A Dependent Care Flexible Spending Account (FSA) lets you pay for childcare with pre-tax dollars, reducing your taxable income and saving you money on both federal income tax and FICA taxes.

2024-2025 Limits:

• Maximum Contribution: $5,000/year per household (or $2,500 if married filing separately)
• Tax Savings: Typically 30-40% depending on your tax bracket and state taxes
• Employer Setup: Must be offered through your employer

How It Works: You elect to contribute a specific amount each year (e.g., $5,000), which is deducted from your paycheck pre-tax. You pay for childcare out-of-pocket, then submit receipts for reimbursement from your FSA account.

Qualified Expenses:

• Daycare and preschool
• Before/after school care
• Summer day camps (not overnight)
• In-home care providers (nanny, babysitter)
• Adult day care for disabled dependents

Example Savings: Family earning $100,000/year with $8,000 in childcare costs:

• Without FSA: Pay $8,000 after-tax (effective cost: ~$11,429 pre-tax at 30% tax rate)
• With FSA: Contribute $5,000 pre-tax, pay $3,000 after-tax (effective cost: $7,286 pre-tax)
• Savings: $1,500-$2,000/year

Important Restrictions:

• "Use it or lose it"
• Unused funds don't roll over (though some employers offer a grace period)
• Cannot be used for overnight camps, kindergarten, or first grade+
• Care provider must have a Tax ID number
• Cannot use for care while you're not working (unless looking for work)

Coordination with Child and Dependent Care Tax Credit: You cannot "double-dip"

• expenses reimbursed by FSA cannot be claimed for the tax credit. FSA is usually better for high earners since the credit phases out at $43,000+ income.