Don't Miss Out on This Easy Way to Pay for Child Care

By Carrie Kirby on 6 July 2016 0 comments

A lot of people are aware that they can sock money into their employer's Health Care Flexible Savings Account program to be ready for the next root canal or other medical expense. But not everyone realizes that there is another kind of FSA — the Dependent Care FSA — that can be an even better benefit to stressed families.

Families who make the most of their employer's Dependent Care FSA can save $1,500 or more, says Jody Dietel, Chief Compliance Officer at WageWorks, one of the companies that administrates FSAs. This is based on the annual $5,000 contribution limit, and her estimate that most families save 30% to 40% in taxes by participating.

"You could pay for your family's summer vacation by participating in a Dependent Care Flex Spending Account," Dietel says.

Like Health Care FSAs, Dependent Care FSAs are offered as part of employer benefit packages. Both kinds of FSA allow workers to set aside a certain amount of their pay, free of state, federal, and Social Security taxes, to apply to qualifying expenses. For the dependent care FSA, qualifying expenses are for day care for your dependents while you work or look for work.

Sounds good, right? And yet, Dietel says, many workers whose employers offer these plans never sign up for them. Here's why you should not let this opportunity pass you by:

1. Day Care Is Expensive, But Predictable

While you may put aside a lot of money for medical expenses and then not end up needing it, most families with young kids will easily spend the $5,000 contribution limit. In fact, sending an infant to a child care center costs between $10,000 and $20,000 a year. And unlike a root canal, you typically know at the beginning of the year that you're going to need day care.

2. If Your Needs Change, You Can Change Your Contribution

Although child care expenses are relatively predictable, things happen. You may change providers, or change the number of hours you work. Such things are qualifying events that allow you to change the amount you contribute to the FSA or stop contributing altogether, Dietel says.

"Let's say your mother comes to spend three months with you during the summer (to care for your children). You could stop your day care flexible spending contributions," she explains.

3. It's Not Just for Kids

Most people only think of these plans for child care, but they can actually be used to pay for the care of any dependent or household member who can't care for themselves. For example, if your spouse becomes disabled, or you become responsible for your parents' care, you can use FSA funds to pay for that.

"More people now are taking care of elderly parents," Dietel says.

4. You Can Use It to Pay for Classes and Day Camps

Dependent care FSAs are not just for day care centers or baby sitters. You can also use it send your kid to an after-school gymnastics class or a summer day camp — as long as the primary purpose of the camp or class is to provide supervision while you work or look for a job. This provision can be a lifesaver for the summer months, when paying for activities while kids are out of school strains family budgets.

The only caveats: You can't pay for sleep-away camp with FSA funds, and the primary purpose of the day camp should be care, not learning a skill.

5. Even If You Don't Spend Every Dime, You May Still Come Out Ahead

Some workers are scared away from FSAs by the use-it-or-lose-it aspect — if you have unspent funds left at the end of the year, you forfeit them. But you shouldn't let that fear keep you from taking advantage of this benefit. First of all, Dietel points out, even when the calendar year ends, many employers now offer grace periods in which to spend any unused funds. And even when the time has truly run out, many families are able to claim any remaining funds by looking through their records and submitting receipts that they had overlooked.

But even if you have a few bucks you can't claim, don't despair. As Dietel puts it, if you saved $1,500 over the course of the year, leaving $25 or $50 unclaimed is not a net loss.

6. FSAs Are Usually a Better Deal Than the Dependent Care Tax Credit

When filing your taxes, you have the option to deduct some of your annual child care expenses. You can't double dip — that is, you can't take a tax credit on care you paid for through your FSA. The FSA is usually the better deal, Dietel says, because it exempts you from state taxes and Social Security, not just federal taxes.

Although you can't double dip, you may not have to choose. Dietel points out that if you have enough child care expenses to satisfy the IRS requirements for the Dependent Care Tax Credit and use up your FSA separately, you can use both, applying each to different expenses. Consult an accountant or the IRS for more details on how to do that legally.

7. It's Easier to Use Than You Think

In the past, workers had to fax or scan in and upload paper receipts to get reimbursed from FSAs. But if you haven't had one for a while, you might not know that a lot of administrators now offer more convenient options, like mobile apps that allow your care provider to sign right on your phone.

Are you using an FSA to help pay for child care?

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