Dependent Care Assistance Account
It’s no secret that childcare and elder care can be a necessary but costly expense. Fortunately, with a Dependent Care Assistance Account, you can pay for eligible day care, after school care, and senior care with pre-tax money, relieving some of the financial burden from caring for your loved ones.
Substantial Tax Savings
Because your contributions are deducted from your pay before taxes, you save 30-40% on your dollar (depending on your tax bracket). For example, to take home $400 of post-tax money, you would need to earn about $520, but by using a Dependent Care Assistance Account, you only need to make $400.
What Can I Be Reimbursed For?
A Dependent Care Assistance FSA does not have a uniform coverage rule, meaning you can only be reimbursed up to the amount you’ve accumulated in your account — a pay-as-you-go approach. Eligible expenses are defined as those that enable you (and your spouse) to work, look for work, or be a full-time student, including:
- Child care centers that care for six or more children and that meet the IRS’s definition of a qualified day care center
- Caregivers for a disabled spouse or dependent who lives with the participant
- Eligible babysitting
- Nursery schools
A stipulation imposed by the IRS is that the service provider must be over 18 years of age and cannot be an individual for whom a personal tax exemption may be claimed.
The maximum annual contribution is $5,000 ($2,500 for married participants filing a separate income tax return), but no more than the lesser of the earned income of the employee or his spouse. If your spouse is a full-time student or incapacitated, the maximum annual election is $3,000 for one child or $5,000 for two or more children. The amounts are subject to change due to IRS guidelines.
For the purposes of your Dependent Care Assistance Account, a qualified person is defined as any of the following:
- A child under age 13 who qualifies as a dependent for income tax purposes.
- A spouse who is physically or mentally unable to care for himself or herself.
- A parent who is unable to care for himself or herself and who qualifies as a dependent for income tax purposes.
- A child who is not under age 13 but mentally or physically incapable of self-care.