Child care Expensive, and many families are struggling to pay unexpected care costs, while their children are off to virtual school or their preschool and school programs due to COVID-19. A dependent care flexible spending account can provide tax-free funds for these expenses and can help you Raise Your Child Care Dollars.
If your employer provides a fiduciary care FSA, this is a particularly important year to consider enrollment in the account during an open enrollment session. And if you already use a dependent care FSA, this is a good time to reassure your care costs and change your level of contribution if necessary. You may have little or no opportunity to make midair changes, and do not have time to place your dependent care FSA decision on autopilot. Here’s how to get the most out of this valuable benefit.
Who is eligible for a dependent care FSA?
Most large employers offer a Dependent Care FSA, Which gives you a rebate of up to $ 5,000 per household to pay for the care of children under the age of 13 while you and your spouse work or work. The cost of day care, preschool (but not tuition for kindergarten or older), a nanny or babysitter, before and after school care, and even day camps during summer or school break are eligible. Overnight camps do not count.
Dependent care FSA contributions are pretaxes, meaning they avoid federal, state, and Social Security taxes, and funds can be tax-exempt for qualified childcare expenses.
Using pretax money for child care costs can save you hundreds of dollars or more. For example, if you contribute a maximum of $ 5,000 a year and are in the 24% tax bracket, you can save about $ 1,583 per year in taxes, including both federal income tax and 7.65% Social Security and federal taxes, Kimberley Says Sipens, senior director of benefits for the profit consulting firm, Willis Towers Watson. You can then make that money tax-free for child care expenses.
Natalie Taylor, a certified financial planner from Santa Barbara, California, says, “As long as my clients have a tendency to take advantage of dependent care FSAs, as long as they believe their childcare expenses exceed the FSA limit or will get.” “With childcare expenses ranging from $ 1,000 to $ 2,500 per month for my clients, dependent care FSAs are a great option.”
The downside to trusted care FSAs is that you usually have to use the account money by the end of the year or you lose it. Some employers offer a grace period until March 15 of the following year to use the money, but this is unusual – Tippens estimates that only 10% of employers work with those who have extended the grace period for dependent care FSAs. Is adopted.
“Since dependent care FSAs are use-it-and-lose-it, I recommend that clients be conservative in their estimate of childcare costs,” Taylor says. “If there’s a good chance that they won’t spend money, the tax break is not worth it.”
What if my childcare needs change during the year?
It is important to think carefully about how much you can have Child care costs For the upcoming year when dependent care is signing up for the FSA as you have limited options to make changes after open enrollment. But with so much uncertainty about school and jobs, it can now be difficult to estimate your annual expenses. However, there are some situations where you can change your contribution during the year.
“Employees are typically locked into the amount they choose, no midyear changes are allowed when they enroll – unless of a family such as birth, divorce, marriage or death There is no change in the situation, ”says Tipons. “Other permitted changes that an employer may allow include a change in the cost of care or loss of dependent eligibility, such as a child having turned 13 or a disabled relative now able to care for himself, or you or you Changes in employment status for the spouse. “
The Coronovirus Aid, Relief and Economic Security Act allowed employers to add a special midyear open enrollment period in 2020, when employees can initiate, pause, increase or reduce their contributions for other reasons, but this There was a special situation.
“Because COVID caused some childcare expenses to rise and some to go down, I had some clients who needed to adjust their fiduciary care FSA election to their care,” Taylor says. “But for many, myself included, COVID caused childcare expenses with primary-aged children doing school at home.”
Different Health Care FSAs, Where you can use the entire plan to contribute for the year on January 1, you can only use the funds from the dependent care account after contributing from your paycheck. “The amount available for reimbursement at any time is the amount actually contributed to minus paid claims,” Tipons says.
Which is better: Dependent Care FSA or Child Care Tax Credit?
Child takes care of tax credit Dependent care offers the same benefits as the FSA: With both types of accounts, the break applies to childcare costs for children under 13 when you work or look for work. The number of types of child care is also similar. But the method of calculating tax break is different. FSA-dependent care is usually a better deal, especially when your income is high.
If you have an eligible child, or have a child care tax credit ranging from $ 6,000 to $ 3,000 in expenses for two or more children, child care expenses can range from $ 3,000 to 35%. The lower your income, the larger the credit. There is no income limit to qualify. If you make more than $ 43,000, the credit is 20% of your eligible child care costs, which can result in a tax break of $ 1,200 for an eligible child or two or more children.
“While both tax credits and a dependent care FSA provide tax benefits, the FSA plan provides the largest tax benefit, particularly to those with a child,” Tipons says. “For people with two children, they can maximize tax savings by contributing $ 5,000 to dependent care at the FSA and claiming an additional $ 1,000 dependent care tax credit.”
You cannot claim the Child Care Tax Credit for care that you pay from the Dependent Care FSA, but there is one situation where you can benefit from both tax breaks: Dependent Care FSA Limit $ 5,000 per home No, how many children do you have. But if you have two or more children under the age of 13, you can usually claim a child care credit for expenses up to $ 6,000. This means that if you have two or more children and the cost of child care is $ 6,000 or more, you may be able to claim a child care tax credit for an additional $ 1,000 of expenses, which is your The addition of $ 200 to $ 350 may reduce your tax liability, depending on your income.
If your employer does not offer a dependent care FSA, or if you have not signed up during open enrollment, you can still take the child care tax credit – which is a consideration when filing your 2020 income tax return It is good to keep in COVID-19 because in the middle of this year there was a sudden need to take care of new children.
Dependent care Another difference between the FSA and the child care tax credit is administrative requirements. For the child care tax credit, you must include the care provider’s social security number or the tax ID of day care, camp, or preschool with you. Income tax return, Then keep receipts for your expenses in your tax files. A dependent care FSA administrator can ask for more detailed information before tapping your account. “All claims must be verified and the Claims Administrator will require (minimal) documentation including dates for providing care that have provided care (name, address and possibly tax identification or social security number) of care. Details and the amount charged, “Tippens says. “Credit card receipts, canceled checks and balance due details usually do not provide all the detailed information.”
Can I use Dependent Care FSA for Aging Parents?
Dependent care FSAs are not just for children. If you are Supporting elderly parents, Then you may also be able to set aside pretax money to pay for their care. But they need to meet a number of requirements: they must be your dependents for tax purposes, they have to be with you, and you must provide at least 50% of their support. They should be physically or mentally unable to take care of themselves, and great care must be provided so that you and your spouse can work or watch work.
If they meet these requirements, you can use the Dependent Care FSA for many types of large care expenses. “Eligible expenses may vary depending on the employer’s plan, but some common expenses include adult day care centers, senior care, home or someone else’s home care and transportation from home to the carer’s facility,” Tipons says Huh.