The dependent care FSA

How it works

During open enrollment the worker picks a yearly amount up to this year's official dependent care fsa limit (not yet verified here; see the official source below), and payroll takes it out in equal pieces before federal income tax, Social Security, and Medicare tax. The worker pays the care provider, then submits receipts to be repaid from the account. The care must allow the worker, and a spouse where married, to work or look for work, and the dependent must be a child under 13 or a spouse or dependent unable to care for themselves. The limit is per household, not per worker, and a married couple filing separately gets half. Money not used by the end of the plan year, plus any grace period the plan offers, is forfeited. Amounts run through the FSA reduce the expenses that can be claimed for the child and dependent care credit.

What it gives

The savings include Social Security and Medicare tax, not only income tax, so the benefit is larger than a deduction.

The provider's tax ID is all that is needed on the claim, and most daycare centers supply it.

Payroll takes the money in pieces, so a large yearly care bill is spread across the year.

What it costs, or where the catch is

Money left at year end is lost, so a change in care during the year can strand a balance.

The limit is per household, and a couple who both elect the full amount has to unwind one.

The same dollars cannot also be claimed for the dependent care credit, which is sometimes worth more at lower incomes.

A worked example

Imani pays $1,100 a month for daycare, which is $13,200 a year. She elects $5,000 through her dependent care FSA. At a 22 percent federal rate plus 7.65 percent for Social Security and Medicare, the tax avoided on $5,000 is $5,000 times 0.2965, about $1,480. Her remaining $8,200 of care can still be used toward the dependent care credit, up to that credit's own limits.

Where it goes wrong

The common miss is electing the full amount in a year when a child turns 13 or a grandparent takes over the care, and losing what was not spent.

Who confirms it for you

For your own numbers, the plan administrator or HR. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS Publication 503, Child and Dependent Care Expenses. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.