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!
About Greg
Great first post (not just saying that because I am scared of Holly’s karate chops)! We have a very similar childcare concept in the UK through my work. Will definitely consider this for when we have kids
Savvy Scot recently posted..Changing the Future of Investing
Good post! Thankfully we’ve never had to pay for daycare, but have had many friends who’ve had to and many took advantage of this. It can be a great way to curb the cost many will feel.
John S @ Frugal Rules recently posted..4 Minutes That Changed My Life Forever
I haven’t looked into FSAs as much as HSAs, but it sounds like the same tax-savings win that HSAs offer. I also like the fact that if you don’t use it you don’t lose the balance, which is one of the biggest things I like about HSAs as well.
Thanks for sharing Brian!
DC @ Young Adult Money recently posted..The Laffer Curve and the Fiscal Cliff
Great article. I haven’t quite research a ton about HSAs or FSAs, but this was a helpful start. I have talked to my employer and the program is one of those if you don’t use it, you lose it.
Seth – The good thing about the FSA for Dependent Care is that at the end of the year, you just figure out how much is left, request that amount, and zero out your account… In most cases, people end up spending way more than what they can write off on taxes or benefit from FSAs.
My employer says you cannot do both the FSA and the tax thing, you have to choose one or the other. They even have a chart about which to choose.
nicoleandmaggie recently posted..What the allowance does
Bummer, but you are under the restrictions of your company when it comes to their HR decisions on benefits… Pick which one helps you the most…
The internet tells me that you need to have two or more children in order to be able to do both. There are some other restrictions as well.
nicoleandmaggie recently posted..Typical professors
Nice first post Brian. Welcome to the blogging world. This account sounds really beneficial but considering the use it or lose it rule you would have to be very strategic about how much to put it. It’s one thing when you’re blowing the companies money at the end of the year because you have use it or lose it cash in your budget, but it’s a real bummer when it’s your own cash.
Mandy @MoneyMasterMom recently posted..The Evolving Bucket List
Well, we easily spend more than the $6000 credit and $5000 maximum per family, so we don’t really lose anything – we pay child-care for 3 kids right now. You just submit an invoice from daycare you already paid, submit any remainder in the FSA account and you’re good to go. I’m on my 3rd year and have never lost any money. Even if you lost $50 or whatever, the tax savings easily makes up for it on the $2500-$5000 to get tax free.
Having an FSA is definitely a good thing! We use the medical FSA and it has helped with all the unexpected medical expenses. I stay home w/my daughter so I’m not sure about my husband’s job’s FSA for dependent care.
Mackenzie recently posted..The Shopping Cart Is No One’s Friend
In 2011, even small busiesses were allowed to do dependent care FSA’s, so for one year at least, it was like getting 25% off day care. My daughter is in kindergarten now. I only wish I could have done it for prior years.
Kim@Eyesonthedollar recently posted..Obesity in America: What It Costs Us
FSA sounds like a great option ! Great article!
Gillian @ Money After Graduation recently posted..Beauty Tricks that Actually Work
This is great information and it never occurred to me that you could link your FSA with childcare expenses. Although I’m scared of being karate chopped, there is no need to be… I really enjoyed the author’s voice and the article was a great read. I now have to go and look into my FSA account at work. (I’m only using an HSA account)…
Jason Clayton | frugal habits recently posted..What is the Fiscal Cliff and Why Should you Care
Great option, didn’t even think about this. So there are no penalties for withdrawing at the end of the year if you don’t use it? That seems weird…I’m assuming you at least have to pay the taxes on it?
Jacob @ iheartbudgets recently posted..6 Month Blog Anniversary and $25 Amazon Gift Card Giveaway!
No taxes – you just have to show you incurred the expense… That’s why they limit it to $5000 per household and $2500 individually if filing jointly
Great first post Brian.
I never knew about this program, although I don’t have children it would be great for my brother-in law. I’ll have to check it out.
justin@thefrugalpath recently posted..Common Reasons Why People Complain About Money
Thanks for stopping by, Justin!
i think that these dependent care FSAs are so great.. if and when my wife goes back to work, we will absolutely take full advantage of this..
personally.. i think that the government should do more to help provide healthcare to families in poverty.. instead of giving people money for nothing.. give them money for childcare so that it will free up their days to work..
Jefferson @SeeDebtRun recently posted..Love Technology? Want to Win an iPad Mini? Don’t Miss This Post!
I agree! There is a lot of crazy going on in this country.