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

Dependent-care Flexible Spending Accounts (FSA) 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)'

Dependent-care FSA contributions are taken out of employee paychecks before most taxes are applied, making those contributions exempt from federal income taxes, payroll taxes and some state income taxes. Some states charge state 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 participate in the FSA. If the taxpayer is married, the spouse must have an earned income, be actively looking for work or attending school full time.

Special Considerations for Dependent-Care FSAs

As an example, assume that your combined federal, state and payroll taxes are 30%. If you contribute the maximum of $5,000 to the FSA, that saves you $1,500 in taxes. Most employers require that 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. Flexible Spending Account (FSA)

    A flexible spending account (FSA) is a type of savings account, ...
  2. Financial Services Authority - ...

    Regulating body for all providers of financial services in the ...
  3. Child And Dependent Care Credit

    Child and dependent care credit is a non-refundable tax credit ...
  4. Dependent Care Credit

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

    A health reimbursement account (HRA) is an employer-funded plan ...
  6. Health Savings Account - HSA

    A Health Savings Account (HSA) is an account for individuals ...
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. Taxes

    Save Money By Spending With A FSA

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

    Benefits Of A Dependent Care FSA

    Here's how your Dependent Care FSA works and how you can use it to your advantage as a parent with dependents.
  4. Insurance

    20 Ways to Use Up Your Flexible Spending Account

    You lose any remaining funds in your flexible savings account at the end of the year. Here is a list of things you can buy with the cash.
  5. Insurance

    How to Maximize the Use of Your HSA

    A health savings account is an often misunderstood financial planning tool.
  6. Financial Advisor

    HSA vs. FSA: Navigating the Alphabet Soup

    HSA vs. FSA: Here's a cursory view of these two types of workplace savings accounts to help you make the proper decision in making your elections.
  7. Taxes

    5 Ways To Save On Child Care Costs

    Child care costs can be a shock to new and expecting parents, but are some programs in place to help with the first few years.
  8. 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.
  9. Tech

    Huobi Pro Suspends Crypto Trading in Japan

    Citing compliance requirements, Huobi Pro is suspending cryptocurrency trading in Japan.
RELATED FAQS
  1. Does money in a Flexible Spending Account (FSA) roll over?

    Get the latest information regarding current IRS regulations on how much money can be carried over from one year to the next ... Read Answer >>
  2. Are Flexible Spending Account (FSA) items tax deductible?

    Learn how contributions from a Flexible Spending Account (FSA) are not subject to taxation; however, the expenses paid from ... 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. Does FSA cover massages?

    Discover how you can use a flexible spending account (FSA) to cover massage expenses for qualifying medical conditions. Read Answer >>
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center