Dependent Care Flexible Spending Account (FSA) Benefits

If you care for a child or adult who is incapable of self-care, who lives in your home for at least eight hours each day, and whom you can claim as a dependent on your income taxes, you may be able to take advantage of dependent care through a flexible spending account (FSA).

These accounts allow individuals to pay for qualified child and dependent care expenses while lowering their taxable income.

How Dependent Care FSAs Work

Dependent care FSAs are set up through your workplace. Participants authorize their employers to withhold a specified amount from their paychecks each pay period and deposit the money in an account. Instead of using the FSA money to pay for expenses directly, you pay those costs out of pocket and then apply for reimbursement.

Once you have paid for expenses that qualify for reimbursement from the FSA, you will need to complete a claim form provided by your employer and attach receipts or proof of payment with the form. The receipts must include specific information to prove that the payment was for qualified expenses. Specifically, the receipt must note:

• Patient’s or child’s name: The name of the person who received the service
• Provider’s name: The provider that delivered the service
• Date of service: The date when services were provided
• Type of service: A detailed description of the service provided
• Cost: The amount paid for the service

The main benefit of an FSA is that the money set aside in the account is in pretax dollars, thus reducing the amount of your income that is subject to taxes. For someone in the 24% federal tax bracket, this income reduction means saving $240 in federal taxes for every $1,000 spent on dependent care with an FSA.

Dependent Care FSA Limits for 2024

The Internal Revenue Service (IRS) limits the total amount of money that you can contribute to a dependent care FSA. The 2023 dependent care FSA contribution limit is $5,000 for single filers and couples filing jointly and $2,500 for married couples filing separately. That limit is unchanged from 2023.

Using a Dependent Care FSA

If you and your spouse are divorced, only the parent who has custody of the child or children can use FSA funds for child care. If you are married, both you and your spouse must work and earn income to qualify for reimbursement, unless one spouse is between jobs and actively looking, or is disabled and unable to work. If not, then the money you contribute to the account will be forfeited and you will be billed for the taxes due because you did not pay taxes on the amount in the first place.

The Federal Flexible Spending Account Program (FSAFEDS) has an app to help people with dependent care FSAs manage their receipts and claims. The program’s website provides in-depth information about what these care-specific FSAs can and cannot fund.

The money in your FSA can only be used for expenses for:

• A dependent who is younger than 13
• A spouse who is unable to work and care for themselves
• Another adult dependent who is unable to care for themselves and for whom you claim the dependent exemption on your taxes

Expenses That Qualify for FSA Reimbursement

Once you deposit money into an FSA, you can begin using those funds toward reimbursement for qualified expenses. You can only use the money for bills that meet the IRS definition of eligible dependent care service. This means that the services must be necessary for you and/or your spouse to work and earn an income.

Qualified expenses include:

• Physical care
• In-home care, such as a nanny, babysitter (if there to cover for a parent who is at work vs. recreational reasons), or au pair, or institutional-setting care, such as child or adult daycare services, by qualified caregivers
• Summer day camps
• Before- and after-school care
• Transportation provided by a caregiver
• Application fees, deposits, etc. required for obtaining care, but only if care is subsequently provided

IRS Publication 503: Child and Dependent Care Expenses outlines expenses that qualify for FSA reimbursement.

Expenses That Do Not Qualify for FSA Spending

Remember that you can only use FSA money for care expenses that are necessary for you and/or your spouse to work and earn an income.

Expenses that do not qualify as FSA-approved and therefore are ineligible in an FSA include:

• Education (i.e. kindergarten, summer school, tutoring, school tuition)
• Overnight summer camps
• Enrichment programs and lessons (i.e., music, sports lessons)
• Meals
• Housekeeping

Special Considerations for FSA Dependent Care

Before creating a dependent care FSA, you should consider some important points.

FSAs are not “pre-funded.” With some healthcare FSAs, the employer fronts the money and is repaid through paycheck withholding. With dependent care FSAs, you pay expenses out of pocket, then receive reimbursement based on how much you have withheld from your paycheck for dependent care expenses.

FSAs typically operate with a “use it or lose it” policy, meaning that you must use all of the money you deposited into the account for qualified expenses by the end of the plan year or you will lose your money.

However, there are occasionally some exceptions. For example, in 2021, due to provisions of the Consolidated Appropriations Act, employers could allow all unused funds to be carried over to 2022 and used throughout the year. While a dependent care FSA typically does not allow carryovers, there is a grace period from Jan. 1 to March 15 when you can use funds from the previous benefit period to cover eligible expenses.

You will need to report your FSA contributions on your federal tax return. Also note that participation in a dependent care FSA is not automatic—you must reenroll every year by the enrollment deadline.

You can only change the amount of money that you choose to have withheld from your paycheck for the FSA within a 31-day window following a qualifying event, such as a marriage, the birth or adoption of a child, the death of a dependent, divorce, or a change in your (or your spouse’s) employment.

The Bottom Line

Opening and funding a dependent care FSA can help you plan and pay for the care you need to help you be able to work and earn a living. Consider looking into a plan offered by your or your spouse’s employer, and learn about how much you could save on taxes by taking advantage of this option.