Details about the dependent care Flexible Spending Account

A dependent care Flexible Spending Account (FSA) enables you to set aside pre-tax money for certain dependent care expenses. You qualify if you work, have an eligible dependent, and one of the following is true:

• You are a single parent
  
  
• You have a working spouse
  
  
• Your spouse is a full-time student for at least five months during which you work
  
  
• Your spouse is disabled and unable to care for herself or himself.
  
  

Eligible dependents include children under the age of 13 and any person you could claim as a dependent on your federal income tax return who is mentally or physically incapable of caring for himself or herself and lives in your household at least eight hours a day.

The specific expenses covered by the dependent care FSA are subject to Internal Revenue Service (IRS) guidelines. They include:

• Childcare expenses for children under the age of 13 at a childcare center, nursery school, day camp, or private sitter. Expenses for a private housekeeper apply if childcare is part of his or her duties.
  
  
• Pre-school and after-school childcare programs. Tuition expenses are not eligible.
  
  
• Care for an adult dependent who lives with you for at least eight hours a day – care can be in your home or at an outside facility.
  
  

Because you're using pre-tax funds for childcare and similar services, the dependent care FSA reduces your federal and state income taxes. Plus, contributions come out of your paycheck automatically, so you know the money is there when you need it. Just be sure to plan your contribution amount carefully – unused dependent care FSA money is not returned to you at the end of the plan year, nor is it carried over to the next plan year.

For every pay period, a portion of your annual contribution is deducted from your paycheck. Your available dependent care FSA balance increases by the amount deducted. That means, at any point during the year, you'll only be able to submit dependent care FSA claims equal to or less than the total amount deducted from your pay at that point. By the end of the plan year, your total paycheck deductions will equal the total you chose to contribute.

When you have eligible expenses, you pay them out of pocket and keep the receipt. When you want to be reimbursed for these expenses from your dependent care FSA, complete an FSA claim form and submit it with the receipts to the address or fax number specified on the claim form.

According to IRS rules, the total expenses that can be reimbursed with an FSA are limited to the earnings of the spouse with the lower income. If the spouse is a student or disabled, the IRS assumes a monthly income for the spouse of $200 for one qualifying dependent in the household, and $400 for two qualifying dependents in the household. Therefore, if your spouse is a full-time student and you have one qualifying dependent, the amount that can be contributed tax free is 12 x $200 or $2,400. If you choose to contribute more than this to a dependent care FSA, you pay taxes at the end of the year on the amount over $2,400. Similarly, if your spouse is a full-time student and you have two or more dependents, your benefit is limited to $4,800.

Tax savings example

Sure, your paycheck might look smaller when you have an FSA – but if you use all your FSA funds, you get that money back.Remember: you’re using your FSA to pay for something you’d buy anyway. Instead of using your take-home pay – money the IRS has already taken a cut of – you’re spending money the government hasn’t touched. So for example, if your tax rate is 28 percent, you’re getting a 28 percent discount on qualified expenses.

Here's an example ...

Last year, Laura made $28,000 and put $1,500 in her dependent care FSA. The example below shows how much she saved by using the pre-tax money for qualified dependent care expenses. Without an FSA, she would have paid for these expenses from her take-home pay, which she paid taxes on.

Example of annual tax savings*	With FSA	Without FSA
Laura’s taxable income	$28,000	$28,000
Pre-tax money deposited into her FSA	-1,500	-0
Laura’s remaining taxable income	26,500	28,000
Minus federal and Social Security taxes	-9,447	-9,982
Take-home pay spent on qualified expenses	-0	-1,500
Laura’s remaining take-home pay	$17,053	$16,518

Putting pre-tax money in a dependent care FSA saves Laura $535 on her federal tax bill – plus she’ll save on state taxes as well.

* This example is intended to demonstrate a typical tax savings based on 28 percent federal and 7.65 percent FICA taxes. Actual savings will vary based on the individual's tax situation.