Dependent Care FSA: Should You Enroll?
Some parents relish their maternity or paternity leave period, enjoying the time out from work to take care of their children in a way that only parents can. But for many of us, our financial situations mean that going back to work is the reality sooner rather than later.
It’s important to consider your options when it comes to child care and how to pay for it. Here we’re discussing the Dependent Care FSA, an account focused on the costs associated with childcare or other dependent care costs.
What is the Dependent Care FSA?
This account allows parents or caregivers to deposit a portion of their pre-tax paycheck each month towards out-of-pocket expenses. However, these are not pre-funded accounts. This means that many people are caught by the “use it or lose it” red tape on this type of account. If you have not used all of the deposited funds within the “season,” you will lose the money and may be subject to further taxes.
So should you consider enrolling in the Dependent Care FSA (DCFSA) Read on to find out if you qualify and what potential benefits you could receive?
Who qualifies for Dependent Care FSA?
To qualify, you must enroll during the open season each year. But, there are several more stipulations to your eligibility which largely depend on your working situation. Employers will withhold a specific agreed amount from your paycheck each month. This will then be deposited into a separate account which is not subject to tax.
The IRS limits the amount you can deposit into your Dependent Care FSA account each year. Married couples are eligible to deposit up to $5,000 per year when filing jointly or up to $2,500 for individuals.
If you don’t work, you may still qualify for the Dependent Care FSA, if either:
You can prove that you are looking for work
You are incapable of working due to impairment
Dependent Eligibility
The dependent must live with the account holder who is claiming, which could be bad news for divorced parents. If you share custody of a child, you must only claim the expenses for when the child is living with you. Children under 13 are eligible dependents for this, as are elderly parents, spouses unable to care for themselves, or other dependent adults living in the household.
Qualified Expenses
A large number of expenses relating to the care of a dependent child or adult are included within this program.
For those under 13, this includes: before and after school care, babysitting and nanny services, and summer day camps.
Ineligible Expenses
Unfortunately, not all care-related expenses are covered by the DCFSA, since this is put in place to allow yourself and your spouse to continue working to earn an income. Some examples of costs which are not covered include:
Education costs (ie private tuition, field trips, summer school)
Overnight summer camps
Meals or child support payments
Medical expenses
It is important to note that you have to register for the DCFSA each year, which means the money accrued does not carry over. This leads to the “use it or lose it” dilemma, whereby any money not used on approved expenses will be lost. Furthermore, these costs are payable before you can claim reimbursement, they are not prepaid by the FSA.
These are two important considerations before signing up to the DCFSA. If you’d like to discuss other important considerations related to your finances, please contact me today here.