A dependent care FSA, or flexible spending account, helps you pay for certain caregiving expenses with pre tax dollars. Unlike a healthcare FSA, you can still use a dependent care FSA even if you are enrolled in a high deductible health plan and contributing to a health savings account. However, like most FSAs, this account generally follows a use it or lose it rule. That means you should only contribute money you expect to spend during the calendar year. While some plans allow a small carryover, most of the funds must be used that year or they are forfeited.
These accounts can be used to pay for a wide range of care services for your dependents, including children or elderly family members. Common eligible expenses include daycare, preschool, after school programs, babysitting related to work, nannies, and adult daycare centers. The key requirement is that the care must enable you to work or look for work. In some cases, even related expenses like payroll taxes for a caregiver or transportation provided by the care provider may qualify. However, the money must be spent specifically for care services rather than education or activities.
There are also several expenses that are not eligible, even if they might seem related. You generally cannot use dependent care FSA funds for things like activity fees, tutoring, dance lessons, private school tuition, overnight camps, or babysitting that is not work related. Medical care and nursing home costs are also not eligible since those fall under different benefit categories. Contribution limits can change from year to year, so it is important to check your employer’s plan details. If your employer offers a dependent care FSA and you already spend money on childcare or elder care, it can be a valuable way to reduce your taxable income and save on taxes.
Dependent care FSAs or flexible spending accounts are slightly different from healthcare FSAs. One of the big differences is that you can still use a dependent care FSA, even if you use a health savings account, a high deductible health plan with a health savings account, or HSA. That's not the case if you're using a health care flexible spending account. But like all flexible spending accounts, this is use it or lose it money. So never put more into one of these FSAs than you're going to spend that year. There is a slight amount that you can carry over year to year, but for the most part, don't put anything in there that you don't know you're going to spend in this given calendar year, okay? Flexible spending accounts for dependent care can be used to care for your dependents, whether they are children or whether they are older. For example, some of the things they can be used for include adult daycare centers, after school programs, or pairs. Babysitting. Babysitting even by your relative if the relative is not a tax dependent before or after school program, childcare, custodial, elder care, day camp dependent, or elder care while you work to enable you to work or to look for work elder care in your home or someone else's extended care, which is a supervised program before or after regular school hours.
Housekeeper who cares for your child? Obviously only the portion of the payment attributable to the child care. You can use the FSA for a nanny. You can use nursery school. You can use it for overnight care. You can use it for with documentation that the carer's employment related you can use it for payroll taxes that are related to eligible care. You can use it for preschool. You can use it for registration fees once the care has been given. Senior daycare, sick child care, and transportation to and from the eligible care if it's provided by the care providers. But there are lots of things you can't use it for that you might think you can use it for, right? Activity fees. No. Go. Okay. Babysitting. That's not work related. Right. For. So you can go on a date. No, you can't use it for that. It's got to be the care of the dependents while you work. Okay. Babysitting by your tax dependent, right? If it's your child or if it's your spouse or, you know, your your parents that are dependent on you tax wise or for tax purposes, that's a no no go dance lessons. Can't do that day. Nursing care.
You can't use it for that. You can't use it for educational learning or study skills services, field trips, housekeeping or maid services. You can't use it for kindergarten tuition or language classes. You can't use it for meals, foods, or snacks. You can't use it for medical care. Right. This is the dependent care FSA we're talking about. It can't be used for medical care. You also can't use it for nursing home care, for piano lessons, or private school tuition, or kindergarten tuition or any kind of tuition like that. Okay. Respite care. Can't use it for that. Sleepaway camp. You can't use it for that. And if the transportation to or from the care is provided by somebody other than the care provider, you can't use it to pay for that tutoring. No, this is not for tutoring. This is for dependent care. Okay. A few other things to keep in mind with these dependent care. FSAs is the limits change every year? They may be adjusted upward with inflation. They were particularly high during the pandemic and are now significantly lower than they used to be. But there's lots of things that you can use it for, and just make sure you don't put more in there than you think you're going to spend this year.
They do have to be your dependent, but they can be your parent or they can be your child. Anybody who's actually dependent on you that needs these care services. So check the limits each year. But if your employer offers this and you are actually spending that much money on dependent care, then go ahead and use it. This is probably a better tax break than a lot of the other dependent care stuff out there, like the dependent Care tax credit, for instance. This is probably a better deal for you, by the way, if both you and your spouse are working, but one of you makes more than the Social Security wage limit and you both have a dependent care FSA available to you, have the person with the lower income use theirs, because that is likely to save you significant amount of payroll taxes, right? Because it lowers their taxable income and they pay less in Social Security tax than if the higher earner that's above the wage limit, we're paying for it out of their taxes because they'd only be paying Medicare tax. Hope that's helpful. FSAs are great tax break. I will take advantage if your employer is offering one. Just know what the limits are and what the valid uses for it are.
The White Coat Investor Podcast is for your entertainment and information only, and should not be considered financial, legal, tax or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.
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