One of the newer work perks that we took advantage of this year was the Dependent Care Flexible Spending Account (DCFSA). This is separate from the Health Care Flexible Spending Account (HCFSA) and the Health Savings Account (HSA). However, they do work in a similar way in that you can pay for eligible expenses with pre-tax money and thus save money by being exempt from income taxes on that amount. For example, we were able to pay for $5,000 in preschool expenses using your DCFSA in 2018. At a a 30% marginal total tax rate (see below), that was a $1,500 savings.
Eligible expenses for children (under age 13)
The overall idea is to cover childcare while you are working:
- Nannies, Au pairs, and babysitters
- Daycare and Nurseries
- Preschool
- Before and After School Care Programs. (Non employer-sponsored.)
- Summer Day Camps
Eligible expenses for adults
The overall idea is to cover care for an adult dependent (spouse, relative) who is physically or mentally incapable of caring for themselves and lives in your home for more than half the year:
- Adult or Senior day care center
- In-home custodial caregiver (Non-medical, like eating and bathing assistance)
- Transportation to/from eligible care (by your care provider)
You should keep detailed supporting documentation and itemized receipts for your HR department and potentially the IRS.
Maximum contribution amounts
The annual contribution limits for 2018 and 2019 are below. (They are not adjusted automatically for inflation.) Note that you can’t exceed your earned income.
- $5,000 per year if you are married and file a joint tax return or if you file as single or head of household. (If MFJ, one person can get $5,000 when the other does not participate at all.)
- $2,500 per year if you are married and file a separate tax return. (If MFS, both of you can get $2,500 individually.)
Similar to the Healthcare FSA, these funds must be claimed during the year deducted (plus any grace period) or you will lose the funds. “Use it or lose it”.
Total tax benefit
When you are able to pay with pre-tax money, you are avoiding taxes on:
- Federal income tax
- State income tax
- FICA (Social Security tax)
- Medicare tax
For 2018, the Social Security tax rate is 6.2% on the first $128,400 wages paid. The Medicare tax rate is 1.45% on the first $200,000 and 2.35% above $200,000. For us in the 22% federal marginal tax rate, that’s a total of 22 + 6.2 + 1.45 = 29.65%. So we’re nearly at a 30% savings even ignoring state income taxes. A 30% total tax savings on $5,000 in childcare expenses is $1,500. This is definitely worth enrolling and submitting a few receipts, even if our claim submission system is a bit slow and clunky.
This is also separate from the . You are not supposed to “double-dip” and claim expenses for both this DCFSA and the tax credit.
Bottom line. If you pay for childcare or care for a disabled adult dependent, you should check if your employer now offers a Dependent Care Flexible Spending Account (DCFSA). The times to check are when you get a new job, have a new child, change marital status, your spouse loses benefits, or during Open Enrollment. If you pay for full-time care, it is quite likely you can max this out and save some serious money. Just be sure to file those claims on time!
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