How to think about an FSA and use an FSA in your financial plan.
A Dependent Care FSA is a pre-tax benefit account that allows you to set aside money to pay for eligible dependent care expenses. The money you contribute to the account reduces your taxable income, which means you pay less in taxes.
In 2024, the IRS allows you to contribute up to $5,000 per household (or $2,500 if you’re married filing separately) to a Dependent Care FSA. These funds must be used for eligible expenses incurred during the plan year.
What Can You Use a Dependent Care FSA For?
The funds can be used for a variety of qualified dependent care expenses. Eligible dependents include children under age 13 or adults who cannot care for themselves (like an elderly parent).
Examples of Eligible Expenses:
- Daycare or preschool tuition
- Before-school and after-school programs
- Summer day camps
- Babysitter or nanny services (when used for work purposes)
- Adult daycare services
Important Note: Expenses like overnight camps, private school tuition (K-12), and care provided by a spouse or family member under 19 are not eligible.
You can find more information on eligible expenses in the IRS FAQs on Dependent Care FSAs.
Pros and Cons of a Dependent Care FSA
Pros:
- Significant Tax Savings – Contributions are made with pre-tax dollars, reducing your taxable income.
- Helps Offset Rising Childcare Costs – With childcare expenses on the rise, the FSA can provide substantial financial relief.
- Easy to Use – Reimbursement for eligible expenses is straightforward through your plan administrator.
Cons:
- “Use It or Lose It” Rule – Funds in the account must be used within the plan year, or you risk losing the unused balance.
- Contribution Limits – The $5,000 limit may not fully cover annual childcare costs for many families.
- No Double Benefits – You cannot use the same expenses for both a Dependent Care FSA and the Child and Dependent Care Tax Credit. You’ll need to compare which benefit offers greater savings.
How Much Could You Save?
Let’s say you contribute the maximum $5,000 to your Dependent Care FSA in 2024, and you are in the 24% federal tax bracket:
- Tax Savings Calculation: $5,000 × 24% = $1,200 saved in federal income taxes.
These savings do not include additional reductions for Social Security and Medicare taxes (FICA), which could increase your total benefit further.
How to Decide if a Dependent Care FSA is Right for You
If you anticipate significant childcare or dependent care expenses in 2024, contributing to a Dependent Care FSA can provide meaningful tax relief. However, you’ll need to:
- Estimate your annual childcare costs.
- Compare the Dependent Care FSA savings with the Child and Dependent Care Tax Credit.
- Be confident you can use the funds within the year.
Reminder: These Numbers Can Change Annually
The IRS updates contribution limits and tax rules annually, so it’s important to stay informed. For the most current information, check the IRS website or consult with your financial advisor.
Final Thoughts
A Dependent Care FSA is a powerful tool to help you save money while covering necessary childcare or dependent care expenses. By planning ahead and maximizing your contributions, you can keep more of your hard-earned money in your pocket.
If you need help deciding if a Dependent Care FSA is right for you, or have questions about setting one up, don’t hesitate to reach out!
Other insurance and investment considerations and financial planning questions will apply. This article is for education purposes only and should not be considered advice benefits or insurance investment recommendation.