Will a Dependent Care FSA Save You Money?

“How much!?!“

That is pretty much what any stay-at-home parent or child-free adult says when they find out how much child care costs.

I remember shopping around for childcare. In-home care had very restrictive hours (not even our full working day) and in addition was as expensive as daycare centers, at least in our area.

Some families have the option of turning to their parents or other family to help. Unfortunately, we have no family nearby that could step-up and care for the kids while we were at work.

Thus we turned to daycare centers that had a larger staff and longer hours. But not any daycare center. There were many that we checked out that we decided there was no way we were enrolling our children there. Others were too…not us. But we did finally find a couple places that would work.

No matter where we looked, it was obvious daycare costs an arm and a leg. In fact, it costs nearly as much or more than in-state college tuition. Really! (a bit more on that below)

If only there were discount programs that would work at the daycare, or some way of saving…

What if I told you there is? Well, it’s not coupons (though that would be great). But there is a way to reap tax savings on child care costs.

Costs of childcare

One day, a friend commented that she couldn’t believe how much we paid for daycare. My jaw about dropped as she thought it should only cost about $100/week. Ha!

Well, her kids were much older, and other people she had spoken with often had family around to help. She had no idea what the going rate for daycare was. I could have pulled out over a dozen price sheets from various daycare providers, but held back.

And yet, I was also angry because we really did check around. Rates really were (and still are) sky-high. And we weren’t even at a top-tier daycare center.

Then a couple years later, you should have seen her eyes bug out when we had both children in daycare. At the time, I earned enough from my job that it was still “worth it” economically to stay at my job, but for many that isn’t the case.

It’s obvious why so many households struggle to make ends meet when having to pay for childcare. Or they opt to have a parent stay home because childcare costs more than what the second parent may bring home.

In fact, the local news reported this year that child care in our state costs more per year than public college tuition! That is true for 33 states and Washington D.C. Check out your state info here at the Economic Policy Institute.

So what can you do to help ease the burden, just a teensy bit?

Dependent care FSA

If your employer offers a health FSA, they most likely also offer a dependent care FSA (flexible spending account).

Like its sister health FSA, a dependent care FSA saves you money by allowing you to set aside money from your paycheck pre-tax.

Requirements

There are qualifications that need to be met in order to be able to use money from a dependent care FSA.

The first is that both parents (or you if you are the only parent) work or are going to school full-time. If a parent works from home, that may qualify as well so long as the work actually produces an income more than hobby income. (Check with a tax advisor if you are unsure.)

Limits

While the health FSA can be used on an employee-by-employee basis, the same is not true for dependent care FSA. In this case, setting up a dependent care FSA has a contribution limit of $5000 per-family. If you are married filing jointly or single/head of household, you can contribute up to $5000. It is $2500 if you are married filing separately. Your employer may set lower limits.

Also different from a health FSA, the dependent care FSA is not pre-funded. This means you can only claim reimbursement of fees once your account has money. The FSA also has a use-it-or-lose-it feature, but given the cost of childcare, that shouldn’t be an issue.

Care covered

Most families will use a dependent care FSA for childcare, and the child needs to be 12 or under. A full list of eligible expenses is in IRS pub 503 . Besides daycare centers, expenses covered may include

• Nanny or au pair
• Summer day camps (not overnight)
• Before and after school care

Also covered may be persons that are not mentally or physically capable of caring for themselves, are a dependent, and lived with you for at least half the year. There are more details in pub 503.  You will want to check the details if you believe this may apply to your situation.

Related post: How to Use FSA Money Before it Disappears
Related post: Enrolling in a Health FSA Will Save You Money

What about the tax credit?

For most people earning a moderate to high income, the dependent care FSA will most likely provide better tax savings.

If you earn a lower income, say under 15% tax bracket, maybe even under 25%, or don’t file taxes as married filing jointly, it’s harder to say. One calculator to help you decide which way to go can be found at PayFlex.  Run the numbers for both dependent care savings and dependent care tax credit.

Remember it’s an estimate and if you are unsure about your choice(s), talk to a tax advisor.

The dependent care FSA decision isn’t as clear-cut as a health FSA, but for working families, it can certainly help take a tiny bite out of those steep daycare expenses.

Do you know of other ways to save on child care?