The following is a guest post by Holly’s brother Brian. He works as a subrogation specialist for a large insurance firm. This is his first public blog post, so be nice. If not, Holly will karate chop you to the face! If you are interested in submitting a guest post, please see our guest posting guidelines.
Do you want to know a great way to get your work to pay you back for your daycare expenses? Would it be even better if it was tax-free? Envision this:
- A separate account that holds $5,000 or less
- Of your own money
- Which you can draw from at any time, and…
- Pay no tax on it.
Pretty sweet, right?
What is a Dependent Care Flexible Spending Account?
Most larger employers offer what is called a Dependent Care Flexible Spending Account, or FSA, as a benefit for their employees. Sounds like a bunch of fancy HR words? Here’s how it works…
For those of us with children (I have six under the age of 12), we pay some form of daycare. It’s usually thousands of dollars a year. I hate to even think about it – we have 3 kids in full-day child-care right now. Gulp.
Good ‘ole Uncle Sam lets us get some of this money back in the form of a credit on our annual tax return. But, here’s the catch: there’s a limitation and it’s nowhere near the total yearly amount that some people pay for in child-care expenses. You can claim up to 35% of child-care expenses, but the size of this credit decreases the more you make as a family. The cap is $3,000 for one child and $6,000 for two or more children. If certain tax credits are not renewed in 2013, it could be even less than that.
Our Hero, The FSA
Enter your FSA. You can decide how much you want in the account (up to $5,000 if you file single or $2,500 per person if you file jointly) and decide how much you want deducted incrementally from your paycheck (i.e. $2,500 spread across 26 bi-weekly paychecks is approximately $96.15 deducted per check). These are PRE-TAX contributions. You can file with your FSA provider at any time during the year for the amount that is in your account to date and get reimbursed without taxes ever coming into play.
What Qualifies as Eligible Spending?
There are lots of different things that can qualify as FSA eligible dependent care. You can use your money for expenses like after-school care for kids under 13, babysitters, before-school care, day camp, and preschool. You can even use it for certain other expenses like application fees, registration fees, deposits, sick-child facilities, transportation expenses, and more.
There are some things that are not eligible FSA expenses. Things like kindergarten, dance lessons, tuition expenses, food expenses, boarding school, and other expenses are not considered eligible.
How Would this Work for Me?
So, now that you know what a Dependent Care Flexible Spending Account is, how can it work for you? I’m glad you asked.
Imagine that you have 2 kids and send them to full-time daycare at $175 a week total. That’s $9,100 for a year – scary right? Under certain income restrictions, the IRS will allow you to claim $6,000 tax-free. But, that still leaves you paying $3,100 AFTER-TAX for child-care. With a FSA, you have that $3,100 deducted across 26 bi-weekly paychecks ($119.23 per check), then request reimbursement along the year to get it back. You’re already spending the money – might as well reap the tax benefit.
FSA’s are done online, and you can even get direct deposit with an e-mail from your child-care provider with their letterhead. Piece of cake.
Great examples to use this for:
- Christmas fund
- Vacation fund
- Emergency fund
If you don’t need to use it during the year, GREAT! Cash it out at the end of the year and:
- Put it into savings
- Invest it
- Put it into a 529 plan for your kids’ education
Warning – Most FSA’s are annually “Use-it-or-lose-it.” If you forget you elected the option, your money is gone.
We all spend enough on taxes. If you couple a Dependent Care FSA with a Health Care FSA, you can really have your employer help you out by maximizing the tax benefits you so richly deserve.
Check with your employer today as 2013 enrollment periods are beginning now!