DEPENDENT CARE

Paying for care for dependents so that you can work results in high costs. You can lower these costs using a Dependent Care Flexible Spending Account from work, which can help you save thousands of dollars in taxes for related costs. A dependent care account is a pre-tax account that you can fund to be used towards dependent care services. You fund the account with pretax payroll deductions and doing so reduces the amount of your income that is taxed. You can then use these funds for qualifying dependents for eligible dependent care services provided while you earn an income. 

FUNDING AND USING BENEFIT

            A dependent care account is a work based tax saving account that you can only get from your employer. Due to the tax savings, there are several regulations as to when you can fund it and when you can use the funds. You have to decide every year how much you want your employer to deduct from your paycheck to fund this account. In 2023, the pre-tax contribution limit is $5,000 in this account if you file single or jointly. If you are filing jointly, only one of you can contribute $5,000 as $5,000 is a household limit. If both your employers offer this benefit, you can speak to them about splitting the contribution between the two of you. For those filing jointly, you qualify for this account only if you and your spouse are both working or your spouse is attending school full time or looking for work. Your contribution limit is $2,500 if you are married and filing separately. There are some employers who will contribute to these accounts, however their contribution counts towards your annual limit. You have to use the funds within the same year you added them to the account as these funds do not roll over. There are some employers that will allow you to use any remaining funds the following year with the requirement that you use them at the start of the year before a certain date. 

            This account is usually used as a reimbursement account. An employee would pay for the dependent care service and then submit the receipt as a claim for reimbursement. The receipts usually include the name of the dependent, the service providers information such as their name, address, and tax identification information, the date(s) of the service provided, the type of dependent care service provided, and the amount paid. Check for receipt requirements with your employer and then follow up with your dependent care provider to ensure that the receipt they provide has all the necessary information. 

            There are some individuals who will not sign up for their benefit because they feel as though they are paying twice. The contribution for this benefit is being withdrawn from their paychecks and they are using these same paychecks to pay for dependent care. Needing to do this and then submitting for reimbursement can feel costly and thus unaffordable, but keep in mind that paying for dependent care this way means that any amount you reimbursed from your dependent care FSA is money that you did not have to pay taxes on. There are some dependent care FSA’s that provide a payment card. Having a payment card will still require you to prefund the account but will then allow you to use these funds to pay the provider directly. With or without the payment card, you may have to wait till you your pre-tax contributions match or exceed your receipt amount that you are submitting as a claim before you can get reimbursed. For example, let’s say you put $250 in your dependent care FSA with each paycheck and your weekly cost for dependent care is $600. You have to contribute with three paychecks (totaling $750) before you can get reimbursed for a $600 claim. Some providers may give partial reimbursements as you continue funding the account.

ELIGIBLE SERVICES

Dependent care funds can be used for children under the age of 13 and adult dependents who are physically or mentally unable to care for themselves. For children, you can use the funds for daycare, day camps, and before and after school care. For adult dependents, such as a spouse or a parent, you can use the funds for some licensed dependent care services and transportation costs. Paying relatives or your other dependents to provide care typically does not qualify for reimbursements. Before signing up for this account, you should check with your employers first and any dependent care providers you intend to utilize as these funds can only be used for eligible expenses as outlined by the requirements of the plan. 

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