Dependent Care Pre-Tax Expense Account

If you have a child, disabled parent, or spouse who needs daily care while you work, you can use your Dependent Care Pre-Tax Expense Account to pay for that care. Eligible expenses are generally those that allow you to work. If you’re married, your spouse must be employed, disabled, or a full-time student in order for you to use the dependent care pre-tax expense account. In order to be reimbursed for expenses, the full amount of those expenses must be in your account.

Contribution Limit

The maximum amount you can contribute depends on certain factors. The limits described below apply for both the calendar year (Jan. 1–Dec. 31) and the fiscal year (July 1–June 30).

• $5,000
  • if you’re single and file your taxes as head of household
  • if you’re married and file a joint tax return
• $2,500
  • if you’re married and file separate tax returns
• $1,800
  • if you’re a highly compensated employee (salary of $115,000 or more)

Additional rules apply in certain circumstances:

• If both you and your spouse participate in a pre-tax expense account plan, your combined contributions to both accounts cannot exceed $5,000.
• Your contribution can’t exceed the lesser of your or your spouse's taxable income.
• If your spouse is disabled or enrolled as a full-time student, the maximum contribution is $200 per month if you have one eligible dependent, or $400 per month if you have two or more dependents. This is the income level your spouse is "deemed" to have for purposes of determining how much you may set aside.
• If your child is enrolled at the Penn Children's Center, your maximum contribution amount is reduced by the subsidy that the University provides for the Center.

Eligible Expenses

View a list of eligible expenses under the Dependent Care Pre-Tax Expense Account.

The following eligibility rules apply:

• Dependents who receive care must be under age 13 or physically or mentally incapable of caring for themselves (e.g., a disabled parent or spouse). They must depend on you for more than half of their support.


• You may claim expenses for day care services outside your home. But if the persons receiving the care are age 13 or over and physically or mentally incapable of caring for themselves, the dependent(s) must spend at least eight hours a day in your home for the expenses to be eligible. Twenty-four-hour nursing home care expenses are not eligible.


• You may claim expenses for services given in your home, as long as these services are not provided by someone you or your spouse also claims as a dependent on your tax return, or by another child of yours who is under age 19 (even if you no longer claim that child as a dependent).


• Also, if you use the services of a day care center that provides care for more than six people (other than residents), the center must comply with state and local laws for the expenses to be eligible under the account.

The IRS requires you, in most instances, to report the taxpayer identification numbers of dependent care providers you use. So if you are being reimbursed from your dependent care pre-tax expense account, you should ask each provider for its taxpayer identification number. This will be required on your income tax return. For an individual, the taxpayer identification number is the social security number.

Federal Tax Credit vs. the Pre-Tax Expense Account

You have two options when it comes to getting reimbursed for dependent care expenses: the Dependent Care Pre-Tax Expense Account or a federal tax credit. Generally, the tax credit becomes less valuable as your income increases while the Dependent Care Pre-Tax Expense Account becomes more valuable as your income increases. But keep in mind you have to choose one or the other. You can’t use both for the same expenses, but you can use the tax credit for some expenses and the Dependent Care Pre-Tax Expense Account for others.

The tax credit allows you to subtract a part of your expenses from the federal income taxes you owe. It ranges from 20% to 30% of your eligible expenses, depending on your income. The higher your income, the lower the percentage you may use.

The Pre-Tax Expense Account, on the other hand, reduces your taxable income by the amount of your contributions—reducing the total taxes you owe. Your tax savings are determined by your marginal tax rate—the higher your tax rate, the greater your tax savings.

If your household income is $24,000 a year or more, the Pre-Tax Expense Account is probably more advantageous. But you should check with your personal tax advisor to determine the method that is best for you.