Dependent Care Flexible Spending Account
If you have a child, or a disabled parent or spouse, who needs daily care while you work, you can use your Dependent Care Flexible Spending Account (FSA) 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 for you to use the Dependent Care FSA.
The maximum amount you can contribute to the Dependent Care FSA depends on your marital status, your tax-filing status and income. These limits apply to both the calendar year (January 1–December 31) and the plan year (July 1–June 30):
- Single, file as head of household $5,000
- Married, file a joint return $5,000
- Married, file separate returns $2,500
- Highly compensated employee (earning of $135,000 or more) $2,500
Additional limits apply in certain circumstances:
- If both you and your spouse participate in a flexible spending account plan, your combined contributions to your 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 the University provides for the Center.
Due to an IRS regulation known as “use it or lose it,” if you don’t use the full balance in your Dependent Care FSA each plan year, you forfeit that unused money.
The following eligibility rules apply:
- Eligible dependents must be under age 13, or physically or mentally incapable of caring for themselves (such as a disabled parent or spouse). They must also receive more than half of their support from you.
- 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, they must spend at least eight hours a day in your home for 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
- Another child of yours who is under age 19 (even if you no longer claim that child as a dependent)
- 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.
- View examples of eligible and ineligible expenses.
The IRS requires, in most instances, that you report the taxpayer identification numbers of dependent care providers on your tax return. So, if you’re being reimbursed from your Dependent Care FSA, you should ask each provider for a taxpayer identification number. (For an individual, the taxpayer identification number is the social security number.)
The money you contribute to your FSA during each plan year can only be used for eligible expenses incurred within certain dates. The expenses must be incurred while you’re actively participating in the accounts. Learn how to claim reimbursement for your eligible expenses, including deadlines for incurring expenses and submitting claims.
Federal Tax Credit vs. Flexible Spending Account
You have two options for reimbursements for dependent care expenses: the FSA or a federal tax credit. You can’t use both options for the same expenses, but you can use the Dependent Care FSA for some expenses and the tax credit for others.
- The FSA 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.
- The tax credit lets you subtract a part of your eligible expenses (from 20 to 30%) from the federal income taxes you owe. The higher your income, the lower the percentage you may subtract.
In general, as your income increases, the tax credit becomes less valuable while the Dependent Care FSA becomes more valuable. If your household income is $24,000 a year or more, the FSA is probably more advantageous. But you should check with your personal tax advisor to determine the method that is best for you.