Dependent Care FSA Details
Save Money on Dependent Care Expenses.
The Dependent Care FSA allows you to set aside a "before tax" portion of your gross earnings to use for eligible dependent care expenses, reducing the amount of the federal and social security taxes taken from your paycheck.
The maximum annual DCAP contribution for a single person or a married couple is $5,000 ($2,500 for each participant if filing separate returns).
Who is a qualifying dependent?
- A dependent of the participant who is under age 13, for whom the participant is entitled to a deduction under Internal Revenue Code (IRC) Section 151(c);
- A dependent or spouse of the participant who is mentally or physically incapable of self-care; or
- A child of a divorced or separated participant who is 12 years old or younger, if the participant has custody of the child, even if the participant has released an exemption under IRC Section 152(e)(2).
Which expenses are eligible?
- Expenses necessary for you and your spouse (if married) to be gainfully employed, to find employment or to attend school full-time.
- Nanny expenses, for services provided inside your home, are eligible to the extent they are attributable to dependent care expenses and expenses of incidental household services.
- Dependent care expenses incurred for services outside your home, providing they are incurred for the care of a qualifying dependent that regularly spends at least 8 hours per day in your home.
- Registration fees to a daycare facility are eligible as long as the fees are allocable to actual care and not described as materials or other fees.
- Nursery school expenses are eligible, even if the school also furnishes lunch and educational services.
- Expenses paid to a relative (e.g. child, parent, or grandparent of participant) are eligible. However, the relative cannot be under age 19 or a tax dependent of the participant.
- FICA and FUTA payroll taxes of the daycare provider are eligible.
Which is better, the Dependent Care FSA or the Dependent Care Tax Credit?
It depends on your particular tax situation. You may apply up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals through the Dependent Care Tax Credit. The maximum allowed under the Dependent Care FSA is $5,000. Generally if your household adjusted gross income is less then $43,000 and you have two or more dependents, the federal tax credit is more beneficial. If your household adjusted gross income exceeds $43,000 it is likely the Dependent Care FSA is best for you. You should consult a tax advisor or IRS Publication 503 if you have further questions about the Dependent Care FSA versus the Dependent Care Tax Credit.