With the costs of child and eldercare rising, managing quality care for loved ones can be a daunting task. If your employer offers a dependent care flexible spending account (FSA), consider the tax savings it offers.
According to the California Society of CPAs (www.calcpa.org), a dependent care FSA allows you to direct, on a pre-tax basis, a part of your earnings into a special reimbursement account. Because the money goes into your dependent care account before federal and California income or Social Security taxes are withheld, you pay less in taxes. During the year, you use these funds to reimburse yourself for dependent care expenses.
To help you better understand how FSAs work, CPAs provide these answers to some of the frequently asked questions concerning dependent care FSAs.
Who Qualifies As An Eligible Dependent For A Dependent Care FSA?
These include dependent children under age 13 who are claimed as dependents on your tax return and your spouse or other adult dependent, such as a parent, who is physically or mentally incapable of self-care and for which you maintain a household.
What Types Of Dependent Care Expenses Can Be Reimbursed?
Payments to nursery schools and day care centers qualify for reimbursement, as do payments for before- and after-school care and summer day camp (but not overnight camp) for children up to age 13. If the dependent is not your child, the expense of care outside your home qualifies only if the dependent regularly spends at least eight hours per day in your home. Payments made to an individual or to a relative who cares for your dependents are also eligible, if the caregiver is not a person who you claim as a dependent.
How Much Can I Deposit To A Dependent Care FSA?
The IRS limits the amount of a tax-free reimbursement to $5,000 for couples filing jointly or individuals who are single and head of household. If you are married filing separately, you can set aside $2,500.
What If I Over Or Under Estimate The Amount I Set Aside?
It is important to carefully estimate the amount to deposit in your account because, under IRS regulations, any money left after you have submitted all your claims will be forfeited. There is a grace period, generally until April 15 of the following year, to submit reimbursement claims for expenses incurred in the previous year. If your yearly expenses exceed the amount in your FSA, the remainder must be paid with after-tax dollars.
Can I Change The Amount I Specify?
Once you have designated a contribution amount for a given year, you may not discontinue contributions to your account. The only way the amount can be changed is if you have a change in family status, such as marriage, divorce or legal separation, birth or adoption of a child, or the death of a spouse or dependent. You can also change your contribution amount if there has been a significant change in your spouse's coverage due to a change in his or her employment.
What about the Dependent Care Tax Credit?
You cannot use the Dependent Care FSA and the Federal dependent care tax credit for the same expenses. You will need to determine which approach would be more advantageous. Lower income families may be better off claiming the child-care credit than using a FSA, but it's best to check with a CPA.
What If I Leave My Job?
Your deposits will stop, but through the end of the plan year or until your balance is used up, you can continue to submit claims for expenses incurred prior to termination.