DEFINITION of 'Dependent Care Flexible Spending Account (FSA)'

Dependent-care flexible spending accounts let employees use tax-exempt funds to pay for childcare expenses they incur while at work. Employees can also use FSAs to cover adult daycare expenses for elderly family members who live in the home. Parents and guardians can save a significant amount of money when they use an FSA, rather than after-tax dollars, to pay for dependent-care expenses.

BREAKING DOWN 'Dependent Care Flexible Spending Account (FSA)'

Employers take dependent-care FSA contributions out of employee paychecks before taking out most taxes, making those contributions exempt from federal income taxes, payroll taxes and some state income taxes. Some states charge income taxes on FSA contributions. The maximum dependent-care FSA contribution is $5,000 a year per household or the amount of the earned income reported by the employee or spouse, whichever is less.

Expenses and Eligibility of a Dependent-Care FSA

You can use a dependent-care FSA to cover daycare expenses for a child who’s age 12 or younger. The FSA can cover preschool tuition and summer camps, although you can’t use the account to pay for kindergarten or school tuition for a child age 5 and older. In addition, you cannot use the account to reimburse an older child who watches a younger sibling.

While many taxpayers use the accounts to pay for child-related daycare expenses, you also can use the account to cover adult daycare expenses for other qualifying dependents, including elderly family members who live with you. The coverage also applies to a spouse who is mentally or physically incapable of staying home alone.

A dependent-care FSA is designed to cover daycare expenses that employees incur because they are working, so a taxpayer must have an earned income to take part in the FSA. If the taxpayer is married, the spouse must have an earned income, be actively looking for work or a full-time student.

Special Considerations for Dependent-Care FSAs

As an example, assume your combined federal, state and payroll taxes are 30 percent. If you contribute the maximum of $5,000 to the FSA, that saves you $1,500 in taxes. Most employers require you pay dependent-care expenses out-of-pocket and then file for reimbursement.

Carefully examine your expected daycare expenses before deciding how much to contribute to your FSA. If you fail to use the entire account by the end of the year, you forfeit the remainder. It’s also important to note that the $5,000 maximum contribution applies to single filers and married couples filing jointly. If both spouses work, couples can run all expenses through a single account or divide their FSA contributions between two accounts that total no more than $5,000. If you plan to file for the childcare tax credit, you must subtract any expenses you paid through an FSA.

RELATED TERMS
  1. Financial Services Agency - FSA ...

    Financial Services Agency, or FSA, is a Japanese government entity ...
  2. Dependent Care Credit

    The Dependent Care Credit is a tax credit for un-reimbursed childcare ...
  3. Health Reimbursement Account (HRA)

    A health reimbursement account (HRA) is an employer-funded plan ...
  4. Filing Status

    Filing status is a category that defines the type of tax return ...
  5. Taxpayer

    A taxpayer is an individual or business entity that is obligated ...
  6. Limited Purpose Flexible Spending ...

    A Limited Purpose Flexible Spending Arrangement (LPFSA) is a ...
Related Articles
  1. Insurance

    Benefits Of A Dependent Care Flexible Spending Account

    These accounts can lower your taxable income and help you support a dependent family member.
  2. Insights

    Healthcare FSAs Increase Your Personal Savings

    This benefit could give you a return this year that puts many other investments to shame.
  3. Taxes

    Save Money By Spending With A FSA

    ... And why using a FSA can help you beat the high cost of health care.
  4. Insurance

    Health Savings vs. Flexible Spending Accounts

    When it comes to medical expenses, there are many accounts that provide tax advantages. HSAs and FSAs are two options often offered by employers.
  5. Small Business

    Year-End Finance Tips for Small Firms and Freelancers

    Here's a robust end-of-the year tax-prep checklist for individuals and entities that earn 1099 income.
  6. Taxes

    10 Money-Saving Year-End Tax Tips

    Getting organized well before the deadline will curb your frustration and your tax liability.
  7. Tech

    Japan's Regulators Crack Down on Crypto Exchanges

    Japan's Financial Services Agency is conducting on-site checks of several cryptocurrency exchanges, and will likely slap some with punishments.
  8. IPF - Banking

    Tax-Free Savings Accounts And Instruments

    There aren't many places where you can save your money tax free, but there are a few. Check out these savings accounts and other financial instruments.
  9. Insurance

    Here’s Why You May Be Blocked From HSAs Next Year

    A health savings account can help you save for medical expenses, but starting in 2017 it may be harder to get if your insurance is from Healthcare.gov.
  10. Personal Finance

    What Does It Cost To Raise a Child in America?

    Having a family can be an expensive proposition, but couples who know the numbers can strategize to lower the costs.
RELATED FAQS
  1. Does a Flexible Spending Account (FSA) cover glasses?

    Obtain more detailed information about what medical expenses can be paid using a flexible spending account (FSA), including ... Read Answer >>
  2. Dental coverage on flexible spending account (FSA)

    FSAs can be used to pay for certain dental expenses, including deductibles and co-payments. However, not all types of dental ... Read Answer >>
  3. Does a Flexible Spending Account (FSA) cover teeth whitening?

    Learn about Flexible Spending Accounts (FSAs), and understand the medical expenses on which an individual cannot use FSA ... Read Answer >>
  4. Can a Flexible Spending Account (FSA) be used for Lasik?

    Learn about Flexible Spending Accounts (FSAs) and how the laser-assisted in situ keratomileusis (LASIK) procedure is considered ... Read Answer >>
  5. Do Flexible Spending Accounts (FSAs) expire?

    Learn if Flexible Spending Accounts (FSAs) expire, and the different ways they expire by providing a expiration date, grace ... Read Answer >>
Trading Center