To help ease the burden on working parents, employers increasingly offer flexible spending accounts to their employees. Flexible savings accounts allow employees to set aside some of their paycheck, tax-free, for their eligible out-of-pocket dependent care costs. This can be an attractive option for married couples with children - just make sure you know who can claim what before you set up a FSA.
Advantages of a FSA
A flexible spending account can be used to pay for eligible out-of-pocket dependent care expenses. The expense must be incurred for your child under the age of 13 or for a dependent who is physically or mentally disabled and requires care. Additionally, the costs for dependent care must be incurred because you and your spouse both are working, looking for work or attending school full-time. Unfortunately, just needing a break from the kids every once in a while does not count. Dependent care costs will be deducted pre-tax, meaning you will also save on Social Security tax, medicare tax and state and federal taxes.
Disadvantages of a FSA
Flexible spending accounts have a use-it or lose-it clause. So it is important that you do not allocate more money into the FSA than you can use during the plan year - you will forfeit any money not used by the claims deadline established by your employer. Additionally, be prepared to pay your dependent care costs out-of-pocket first and then receive the reimbursement from your FSA. While health care FSAs often have the convenience of a credit or debit card attached to them, dependent care FSAs generally don't.
Can Both Parents Have a FSA?
If both spouses' employers offer a flexible spending account, you can each contribute to your own FSA. However, you do not get to double the benefit amount. The maximum amount a married couple can claim is $5,000, the maximum household limit. Additionally, if you are married and filing separately, the maximum each of you can claim is $2,500; or if either of your earned income is less than these amounts, then that amount is your maximum. It is also important to know that you cannot both claim reimbursement for the same dependent care costs.
Dependent Care Credit
You may also benefit from the dependent care credit when you file your taxes. You cannot receive both the dependent care credit and the tax break from a flexible spending account for the same dependent care charges. But you can take one credit or the other, and in cases where your dependent care expenses exceed the maximum FSA allocation allowance, you may be able to claim this credit for the excess charges up to it's limit. For those who are eligible, the maximum dependent care credit is $1,050 for one eligible child and $2,100 for two or more eligible children.
- FSA FEDS: Health Care and Dependent Care Accounts-Summary of Benefits with Frequently Asked Questions
- Conexis: Dependent Care FSA
- Kiplinger: Flexible Spending Account vs. Dependent Care Credit
- Benefit Resource Inc.: Dependent Care
- Berger Accounting: Child and Dependent Care Credit & Flexible Benefit Plans
- Aetna: Dependent Care Flexible Spending Account
- Internal Revenue Service: Child and Dependent Care Expenses
- Portland Community College: FSA Frequently Asked Questions
- Goodshoot/Goodshoot/Getty Images
- The Rules for Deducting Childcare Expenses
- How Much Money Do You Get Back Out of Your Child Care Expenses on Your Taxes?
- Is Preschool Expense Deductible From Gross Income on 1040?
- Tax Answers for the Blended Family
- How to Contribute Pre-tax Dollars to Your HSA
- The Pre-Tax Health Insurance Deduction for Employees
- Tax Credits & Tax Liabilities That Cannot Be Received for Married Filing Separately
- Can a Totally Disabled Spouse Be Claimed as an Dependent on Your Tax Return?