One family friendly benefit you should be looking out for is your employer-sponsored Dependent Care Flexible Savings Account (FSA). This program reimburses employees for qualified dependent care expenses, offers substantial tax savings and is easy to use. Here’s how it works –
During Open Enrollment you may elect an amount up to the IRS annual maximum to be deposited into your account. Your employer will make incremental contributions on your behalf based on your payroll frequency. For example, if your annual election is $5,000, the current IRS maximum, your bi-weekly deduction is approximately $192. This amount is reduced from your paycheck before taxes are taken, thus lowering your taxable income.
Take care in specifying your annual election amount as you will not be allowed to make changes mid-year unless you experience a qualifying life event. Additionally, there is typically a use-it-or-lose-it provision included that forfeits any unused amounts after the end of the plan year.
As your funds become available, you may seek reimbursement from your Plan Administrator for qualified dependent care expenses. These expenses include, but are not limited to:
- Preschool or licensed day care for children under 13 years old
- Before or after school programs for children under 13 years old
- Summer day camp for children under 13 years old
- Payment to a relative who is caring for your child(ren) and is over 19 years old and is not your child
- Fees charged by a housekeeper, whose duties also include dependent care
With today’s technology, reimbursement processes have been streamlined. In most cases, claims may be uploaded to your Plan Administrator via their web portal or smartphone app. Likewise, payments may be made to you via direct deposit.
The IRS offers this tax savings opportunity for those parents who work, are looking for work or are in school full-time. Both parents may participate in their employer-sponsored benefit, but each would be limited to funding only $2,500 per year. Families who make the most of this benefit can save $1,500 or more per year, says Jody Dietel, Chief Compliance Officer at WageWorks. Her estimate is that families making the maximum contributions save 30% to 40% in taxes. That should raise a brow.
Those families who have a stay-at-home mom or dad, however, are not eligible to participate in this benefit. Plan participants may not claim expenses for babysitting, child support, overnight camps, activity fees or educational supplies. But, there are special provisions that include reimbursement for expenses associated for care for disabled spouses, adults or children over the age of 13. For more information about these qualified benefits visit https://www.irs.gov/uac/about-form-2441.
It is also recommended that you consult with your tax consultant regarding specific questions you may have or if you need assistance determining whether you are eligible to take a Dependent Care tax credit when you file your income taxes. Whichever route you take, it is important to know you have options and opportunities for stretching your hard earned dependent care dollars.