by WEX Health
A dependent care flexible spending account lets employees set aside pre-tax dollars to help pay for dependent care. Contributing to this benefit reduces taxable income and spreads the benefits of pre-tax dollars throughout the year, helping you save 30 percent or more on your dependent care costs.
It’s a smart way to save money on expenses such as childcare or elderly care for a dependent. But the eligibility of those expenses depends on the status of the dependent and how that care is impacting the parent or guardian’s ability to work.
Dependent care FSA eligibility
Funds can be used to pay for childcare for children under age 13 when they’re claimed as qualifying dependents. But the savings potential isn’t limited to just childcare. They can also cover care for a disabled spouse or dependent of any age.
To be eligible for this type of FSA when offered through your employer, you and your spouse (if applicable) must be employed, or your spouse must be a full-time student or looking for work.
Big savings potential
Let’s say you enroll and contribute the $10,500 per year into a dependent care FSA in 2021 (which is the new 2021 limit as part of the American Rescue Plan Act). You also pay the average American tax rate of 29.8 percent. By putting that money aside pre-tax in a dependent care FSA rather than allowing the funds to be taxed, you save more than $3,000 for the year!
Note: For married couples who file taxes separately, the 2021 limit is $5,250 per person per year.
Fast and simple reimbursement
If you participate in a dependent care FSA by WEX, you have two easy options for collecting reimbursement with this type of FSA:
- Mobile or online reimbursement. You can easily upload documentation to a claim by logging into our mobile app, taking a photo of your documentation with your phone’s camera and uploading it. You can also use your app or online account to upload your Reimbursement Request Form. No additional documentation is required if the form is signed by the dependent care provider. Once enrolled, you can find the form in your online account or by searching our knowledgebase.
- Our Recurring Dependent Care program. If you’re paying for daycare expenses with your account and enroll in this program, you only need to submit one reimbursement form per year for each daycare provider used.
Weighing the tax credit versus a dependent care FSA
The IRS offers a tax credit to those who have childcare or dependent care expenses. You can’t enroll in a dependent care FSA and apply for the tax credit with the same funds. The tax credit is up to $6,000 per year for two or more children.
It’s possible to apply the tax credit to the difference of what you put into dependent care and the tax credit. For example, if you’re putting $5,000 into the account, that would leave $1,000 that you can apply the tax credit to before you’ve reached the $6,000 ceiling for the credit.
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This blog post was updated in March 2021.