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Child and dependent care is a significant financial burden for many families in the United States. Countless individuals rely on childcare services to maintain employment, while others care for aging parents or disabled relatives.
Suppose you find yourself caring for a dependent child or adult who cannot take care of themselves and lives in your household for a minimum of eight hours per day, and you can claim them as a dependent on your tax returns. In that case, a dependent care FSA could help!
How Dependent Care FSAs Work
Dependent care FSAs are established within the workplace, where participants authorize their employers to deduct a specified amount from their paychecks during each pay period. This deducted money is then deposited into an account. Instead of directly utilizing the FSA funds to cover expenses, individuals initially pay for the eligible costs out of their pockets and subsequently seek reimbursement.
After incurring expenses that qualify for FSA reimbursement, individuals must complete a claim form provided by their employer. Along with the form, they must attach relevant receipts or proof of payment containing specific information.
These receipts should include details such as the name of the patient or child who received the service, the care provider’s name, the date of service, a comprehensive description of the provided service, and the amount paid for the service.
The primary advantage of an FSA is that the funds allocated to the account are in pretax dollars. This results in a reduction of the employee’s taxable income. For instance, for someone in the 24% federal tax bracket, this income reduction saves $240 in federal taxes for every $1,000 spent on dependent care using an FSA.
Dependent Care FSA vs. Tax Credit
A Dependent Care FSA (Flexible Spending Account) and a Tax Credit are different methods for addressing dependent care costs.
A Dependent Care FSA allows individuals to set aside a portion of their pretax income to cover eligible dependent care expenses. The advantage of an FSA is that it provides immediate tax savings by reducing the taxable income, resulting in lower taxes owed.
On the other hand, the Dependent Care Tax Credit is a tax credit that can be claimed when filing income taxes. The credit is based on a percentage of the qualifying dependent care expenses incurred by tax dependent during the tax year. Unlike the FSA, the tax credit is applied when filing taxes and reduces the overall tax liability.
Choosing between the two depends on individual circumstances and tax situations. It is essential to evaluate both options and determine which one provides the most beneficial tax advantage for your specific needs.
Expenses That Qualify for FSA Reimbursement
Once funds are deposited into an FSA, they can be utilized to seek reimbursement for eligible dependent care credit expenses. It is important to note that the expenses must align with the IRS definition of qualified dependent care services. These services must be deemed necessary for the individual and/or their spouse to engage in employment and generate income.
Qualified expenses encompass a range of categories. This includes physical care, in which services can be provided at home by caregivers such as nannies, babysitters (if they are present for work-related purposes rather than recreational reasons), or au pairs. Institutional-setting care, such as child or adult daycare services delivered by qualified caregivers, also qualifies. Additionally, summer day camps, after-school programs, before- and after-school care, and transportation provided by a caregiver are considered eligible expenses. Furthermore, application fees and deposits required for obtaining care are reimbursable, but only if the subsequent care is indeed provided.
Expenses That Do Not Qualify for FSA Spending
It’s crucial to remember that FSA funds can only be utilized for expenses that are essential for you and your spouse to engage in work and earn income.
Certain expenses do not meet the criteria for FSA eligibility. These include educational costs such as kindergarten, summer school, tutoring, and school tuition. Overnight summer camps, enrichment programs, and music or sports lessons are also considered ineligible. Additionally, expenses for meals and housekeeping do not qualify for FSA reimbursement.
Using a Dependent Care FSA
In the case of divorce, only the custodial parent is permitted to utilize FSA funds for childcare expenses. For married couples, both spouses must be employed and earning income to qualify for reimbursement unless one spouse is actively seeking employment or is disabled and unable to work. Failure to meet these requirements will result in the forfeiture of contributed FSA funds and potential tax liabilities.
To assist individuals with managing receipts and claims for dependent care FSAs, the Federal Flexible Spending Account Program (FSAFEDS) offers a dedicated app. Detailed information regarding eligible and ineligible expenses for these specialized FSAs can be found on the program’s website.
It’s important to note that FSA funds can only be used for expenses related to dependents who are under the age of 13, a spouse who is unable to work and care for themselves, or another adult dependent who is incapable of self-care and for whom you claim the dependent exemption on your taxes.
How Does an Employee Get Reimbursed From a Dependent Care FSA?
To get reimbursed from a Dependent Care FSA (Flexible Spending Account), employees typically follow these steps:
Set up a Dependent Care FSA
During the open enrollment period or when eligible for a qualifying life event, employees can elect to contribute a specific amount from their ppretaxincome to the FSA for dependent care expenses.
Incur eligible dependent care expenses
Employees must pay for qualified dependent care expenses out of pocket. These child care expenses must meet the IRS definition of eligible dependent care services, such as child care or adult care necessary for employment.
Keep records and receipts
It is crucial to keep detailed records and receipts for all incurred expenses. This includes invoices, bills, or proof of payment that specify the name of the dependent, service provider, date of service, type of service, and cost.
Complete a claim form:
Employees need to obtain a claim form from their employer or FSA administrator. The claim form typically requires the employee’s name, FSA account details, dependent information, and a breakdown of the incurred expenses.
Attach required documentation
Employees must attach supporting documentation, such as receipts or proof of payment, along with the claim form to validate the eligible expenses.
Submit the claim
Employees should submit the completed claim form and supporting documentation according to their employer’s instructions or the FSA administrator’s guidelines. This is usually done electronically or through mail.
Once the claim is submitted, the FSA administrator reviews all the funds under the claim and verifies the eligibility of the expenses. If approved, the employee will receive reimbursement for the eligible expenses, typically through direct deposit or a check.
It’s important to note that each employer or FSA administrator may have specific procedures and timelines for reimbursement, so employees should familiarize themselves with the guidelines provided by their employer or FSA administrator.
Frequently Asked Questions
Can you use FSA for dependent care?
Using this dependent care FSA, you may use unused funds before tax to fund a child care plan for a child under 12. It Includes daycare, preschool, and summer camps. Parents can also use the money to care for spouses who cannot be cared for. Among other uses are elderly assistance services at home.
What’s the benefit of a dependent care FSA?
A dependent-care FSA can assist your employees and families in putting aside money for children under 15 and dependent adults whose parents cannot care for themselves. Those who pay taxes over the maximum can receive an income tax refund. You will be billed for the account with payroll deductions and taxation.
What is the downside of dependent care FSA?
A few disadvantages to a dependent care program. Cash left over after one month does not carry over to the following year. It will never happen again when an employer doesn’t have one of the accounts you’re looking for. It’s only possible that an employer pays for the required expenses if they have worked.