Key Takeaways
- A dependent care flexible spending account (DCFSA) lets you contribute pre-tax earnings toward qualifying caregiving expenses.
- Only certain expenses can be reimbursed, and they must be directly related to professional caregiving services that allow you to work, look for work, or attend school full-time.
- There is an annual cap on how much you can contribute toward a DCFSA.
- DCFSA funds are use-it-or-lose-it, meaning funds that haven’t been spent at the end of the year don’t roll over for you to use the following year.
For many Americans, the cost of child care and other dependent care expenses can add up quickly. Fortunately, there are ways to offset these costs by reducing your tax obligations. The dependent care flexible spending account (DCFSA) is one way to do that.
What Is a Dependent Care FSA?
A dependent care flexible spending account (DCFSA) is an employer-provided, tax-advantaged account for certain dependent care expenses. Its goal is to help cover the costs of providing professional care so that the caregiver can work, look for work, or attend school full-time.
During a company’s open enrollment period or another qualifying event, an employee can elect to contribute a portion of their salary into the account pre-tax. This can help both employers and employees save money, Pauline Roteta, the founder and CEO of Pasito, a benefits enrollment software company, told the Balance in an email interview.
Employers save money because the DCFSAs are funded through pre-tax payroll dollars. That means the employer doesn’t have to pay Social Security or Medicare taxes on employees’ contributions to those accounts.
Note
A dependent care flexible spending account is also known as a Dependent Care Assistance Program (DCAP). It shouldn’t be confused with a health care flexible spending account, which is used to cover an individual’s qualifying medical expenses.
There are a number of employees who can benefit from opening a DCFSA. If you have a child under the age of 13, or if you care for an older or disabled dependent, you might qualify. According to Roteta, it’s important to check your eligibility with a certified professional.
How a Dependent Care FSA Works
Dependent care FSAs are set up through your employer. You decide on the amount of money you want to contribute to the account each pay period. Those funds are then automatically withheld from your paycheck and deposited before taxes are deducted.
Your employer may also contribute to your DCFSA. Contact your human resources department to find out if this benefit is offered.
You may be able to pay your dependent care provider directly, or you may first have to pay for qualifying expenses out-of-pocket and then get reimbursed.
If you pay for expenses first and then get reimbursed, you’ll need to submit a claim form provided by your employer along with the necessary documentation, including an itemized receipt for the expense and proof that you already paid it.
In order to get reimbursed, make sure you have the following:
- Your name, address, and signature
- Start and end dates for the service you want reimbursed
- Your dependent’s name and relationship to you
- Description of the service and name of the service provider
- Amount you want reimbursed
Note
Credit card receipts, non-itemized cash register receipts, and canceled checks won’t be accepted as proof of purchase for DCFSA claims.
Eligibility
Not everyone is eligible for a dependent care FSA. A few factors that can impact eligibility include the age of the dependent, your relationship to that person, and the types of expenses incurred.
The first step in determining whether you’re eligible for a dependent care FSA is figuring out whether the dependent in question is considered a qualifying person by the IRS.
You should qualify if the dependent falls into any of the following categories:
- Qualifying child: your legal tax dependent who was under age 13 when the care was provided.
- Spouse: a spouse physically or mentally unable to care for themself who lived with you for more than half the year.
- Another dependent: a dependent who wasn’t physically or mentally able to care for themself, lived with you for more than half the year, and either was your dependent or would have been your legal dependent except that:
- They earned a gross income of $4,300 or more
- They filed a joint return
- You or your spouse (if filing jointly) could be claimed as a dependent on someone else’s annual tax return
Note
If you are divorced or separated, the IRS has special rules for who gets to use a dependent care FSA to pay for care-related expenses.
Qualifying Expenses
Not all expenses can be covered using a dependent care FSA. The key is that the account funds are used to cover care-related costs that allow you to work, look for work, or attend school. Examples of qualifying services include:
- Before- and after-school care (but not tuition)
- Babysitters, nannies, and au pairs
- Day care for adults
- Late pick-up fees
- Licensed day care centers
- Nursery schools or preschools
- Placement fees for a dependent care provider
- Day camps
Some examples of expenses that would not be eligible for reimbursement from your DCFSA include:
- Advance payment of services that have not been provided yet
- Educational expenses, such as tuition fees, summer school, or tutoring
- Food, lodging, clothing, education, or entertainment (unless amounts paid for these items are incidental to and can’t be separated from the cost of care)
- Late payment fees
- Medical care
- Overnight camp
- Registration fees
- Transportation expenses unrelated to getting to and/or from the site of care
Contribution Limits
The IRS does limit the amount of money you can contribute to a DCFSA each year. The annual contribution maximum was $5,000 for single filers and married couples filing jointly until the pandemic hit.
Note
For 2021 only, as part of the American Rescue Plan, single filers and married couples filing jointly could contribute up to $10,500 into a dependent care FSA in 2021, and married couples filing separately could contribute $5,250. Employers can choose whether to adopt the increase or not. For 2022 and beyond, the limit will revert back to $5,000.
For your 2022 and 2023 plan years, you will be able to contribute up to $5,000 per year if you are married filing jointly, or if you are a single filer. If you are married, filing separately, you can contribute up to $2,500 per year.
Your Money Doesn’t Roll Over
Unlike a health savings account, unused money in a DCFSA generally doesn’t roll over to the next year. Your employer may offer a grace period of two-and-a-half months into the new year to use up your funds before they expire.
There is an exception for plan years ending in 2020 and 2021, as COVID-19 relief measures allow employers to permit account holders to carry over their unused funds into the next year, which would be 2021 and 2022, respectively.
Dependent Care FSA vs. Child Care Tax Credit
You have another option for saving money on dependent care expenses via lowering your taxable income: the child and dependent care tax credit. Similar to a DCFSA, the credit only applies to expenses that are necessary for you to work, and there are partial exemptions for disabilities and full-time students.
The maximum amount you can deduct for the child and dependent care tax credit is $2,100.
| Maximum Credit Amount, 2023 | |
|---|---|
| One Dependent | 35% of $3,000 ($1,050) |
| Two or More Dependents | 35% of 6,000 ($2,100) |
The child and dependent care tax credit may be a good option for families who don’t have access to a dependent care FSA or those with lower adjusted gross incomes. There is no danger of losing money if you use the tax credit instead of a DCFSA. For higher-earning families, a DCFSA may provide more substantial savings.
If you have two or more dependents, you could put $5,000 into a DCFSA and still claim the credit for an additional $1,000 of expenses.
Note
For 2021, the American Rescue Plan Act raised the maximum taxpayers can receive: up to $4,000 for one qualifying person and $8,000 for two or more qualifying people. It was also potentially refundable for 2021, meaning you might not have to owe taxes to claim it.
Using a Dependent Care FSA for Elderly Parents
Though many DCFSA holders use their funds to pay for child care costs, it can also help cover expenses related to caring for an elderly parent or other dependent.
You need to meet a few qualifications. First, your parent must have lived at home with you for more than half of the year. You can also claim them as a dependent, or would be able to except that they earned a gross income of $4,300 or more, filed a joint return, or you or your spouse (if filing jointly) could be claimed as a dependent on someone else’s annual tax return.
Your parent must be incapable of caring for themself. Finally, the expenses you incurred must be directly related to helping you go to work, look for work, or go to school full-time.
When To Enroll in a Dependent Care FSA
Typically, employees are only allowed to set up or make changes to their DCFSA plans during open enrollment or if they experience a qualifying event (such as getting married or having a child) outside of the company-wide enrollment period.
Frequently Asked Questions (FAQs)
How much should I put in a dependent care FSA?
If you participate in a DCFSA, budget carefully so you don’t over-contribute and end up losing money at the end of the year. You should look back at your bank account and credit card statements from the past couple of years and add up how much you’ve spent on dependent care. Use that number to come up with an estimate. Keep in mind that you can’t contribute more than the annual maximum. For 2022 and 2023, the annual maximum is $5,000 for single people and married couples filing jointly. The annual maximum is $2,500 for married people filing separately.
Who can have a dependent care FSA?
Only certain people are eligible for a dependent care FSA. To enroll, you need to meet the following qualifications:
- You and your spouse work or are looking for work (unless your spouse has a disability that prevents them from working, or attends school full-time.)
- Your employer offers this plan.
- Your dependent is a qualifying person according to IRS criteria.
- You incurred qualifying expenses.
Should I use an FSA or the child care tax credit?
Whether you should use an FSA or the child care tax credit depends on your care needs and financial circumstances. But it’s not necessarily an either-or decision. You can often use both if you don’t double-dip. For instance, if you contribute the maximum allowed to a DCFSA and you incur more expenses beyond that maximum, you may be able to claim the difference on your taxes to receive the credit.
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