There is no doubt about it: child care is expensive! Whether you use a family child care provider, a nanny, or a center-based daycare, your child care costs are probably one of the biggest line items in your budget. Many families pay more for child care than they do for their mortgage or rent.
Finding ways to save money on child care without sacrificing quality is a must for most families. One of the best ways to lessen the impact of the cost of care is to use all of the tax benefits that are available to families with young children. Of these, one of the most important is the Dependent Care Flexible Spending Account (DCFSA).
What is the Dependent Care FSA? In short, it is a way for you to use pre-tax money to pay for post-tax child care expenses. Below we outline what the Dependent Care Flexible Spending Account is in greater detail. We describe how you can access this FSA through your employer. Finally, we’ll cover the possible pitfalls and drawbacks to look out for when taking advantage of this important tax benefit.
What is the Dependent Care Flexible Spending Account (DCFSA)?
The Dependent Care Flexible Spending Account (DCFSA) is a benefit that allows parents and guardians to pay for child care services like daycare, preschool, and day camps using pre-tax money. What does that mean when it comes to your family budget? Using child care FSA pre-tax money rather than post-tax money leads to around a 30% savings in the total yearly cost of care, reports the federal government.
Here are some key components of the DCFSA benefit that you should know about as you decide whether it is the right fit for your family:
The maximum amount allowed is $5000 per year, per family.
Care expenses for children from birth through age 12 are eligible to be claimed.
The amount you choose to have withheldfor each paycheck will be automatically withdrawn and placed in a separate account.
Both full-time and part-time care expenses are eligible.
Day camps, after-school care, and preschool are also eligible expenses.
It is a benefit that is provided by your employer.
Not all employers provide this benefit so you’ll need to check with your employer’s human resources department to see if this is available to you.
How do I use a child care FSA?
Enrolling in a Dependent Care FSA
Your employer should notify you if they provide a Dependent Care FSA to pay for daycare. The sign-up period for the benefit happens when you go through open enrollment for other benefits, like your health insurance.
During open enrollment, you will select the amount you want withheld from each paycheck to be put in your account. Remember, the max amount you can withhold is $5000 a year. You can opt for a lower total amount as well if you do not expect to have $5000 worth of child care expenses in the upcoming year. The final amount you elect to have withheld from your paycheck is determined by what your total costs are for the upcoming year.
Many employers will have you select an amount to be withheld for each paycheck. This means you’ll need to calculate the amount per paycheck to be withheld. For example, if you want to withhold the maximum $ 5000-year limit and you’re paid 26 times per year, your paycheck withholding will be $192.31 ($5000/26).
The amount you choose to have withheld from each paycheck will be pre-tax. That means that it will come out of your paycheck first before other withholding like taxes. This reduces your overall taxable income which in turn saves you money by providing you a lower yearly tax rate.
Submitting Dependent Care FSA claims
Once your benefits year begins you will need to collect your receipts for the payment of qualified child care expenses. Those receipts are then submitted to your dependent care FSA benefits’ provider. Your benefits provider is selected by your employer and they will have a unique process for submitting claims. Contact your employer’s human resources group for more information on how to submit claims for reimbursement.
Most dependent care FSA benefit providers have online portals to submit receipts. Once your claim has been submitted it will be reviewed for eligibility and completeness. The receipt should show who you paid the expenses to and what for (eligibility) and should list the amount and dates of service (completeness). If you’re new to using a dependent care FSA you’ll likely have to create an account. With an account, you’ll be able to see how much is available to be reimbursed, submit claims, and view past claims.
Don’t be surprised if one of your dependent care FSA claims is denied. A claim could be denied for a variety of reasons. One common reason claims are denied is because information, like the program’s tax ID, is missing from the claim. Another common reason claims are denied is if you make a claim before the service has been provided. For example, if you pay for child care at the beginning of the month for the upcoming month’s care, you’ll need to wait until the end of the month to submit the claim. Even though you incurred the cost at the beginning of the month, the claim will not be considered valid until all of the care you paid for has been provided.
How is my child care FSA claim approved?
A claim that is complete and for services already provided should be reimbursed quickly. Typically parents find that they will receive reimbursement within a few weeks of submitting a claim. Some parents will choose to save up their receipts for a few months to do a few larger submissions throughout the year. The benefit of this approach is that it saves time. However, it does mean that you’ll go longer without being able to access the funds in your account. If you need the money sooner, it is probably best to plan to submit a claim at the end of each month.
Overall, most parents find the process of using a DCFSA to be fairly easy. Many employers have moved to online submission of receipts. Claims can typically be directly deposited into your account. Make sure not to submit a claim before the care has been provided! You might find that your claim is denied or you need to resubmit it at a later date.
Even if you do experience a few hiccups in learning how to handle your DCFSA you’ll likely find that it is a very easy process overall. That means you’ll likely spend only a few hours a year managing your DCFSA in return for impressive savings.
Determining the amount to withhold
Determining the right amount to withhold
One of the primary drawbacks of the DCFSA is that it is use it or lose it. That means that if you don’t have enough eligible expenses to match what you have in your account you lose that amount. For families with children in full-time care, it is very unlikely that this will be an issue. For part-time care, or as children get older and require less care, it can be tricky to figure out the correct amount to put in the account.
If you expect that you’ll have less than $5000 worth of expenses in any given year you’ll need to plan out your expenses for the coming year. Think about all of your expenses, including after-school care and camps. Estimate and add up those costs to determine the total amount you want to put into the account for the upcoming year.
Divorce
In the case of divorce, the parent with physical custody of the children can use the DCFSA. This is true regardless of who claims the child as a dependent for tax purposes. Determining which parent has physical custody means adding up the number of nights the children spend with each parent. Divorced parents who split custody evenly may each be able to claim part of the $5000 total yearly amount. This can vary from plan to plan so check with your administrator if you are a divorced parent with split physical custody.
Reimbursement Delay
Reimbursement of care expenses typically only happens once the care has been received. That means that you may experience a delay between when you pay for care and when you are actually reimbursed for those costs.
For example, let’s say your child care requires payment for the upcoming month on the first of that month. You make your payment on the first of the month, but you cannot submit your claim for that month until the month is over. Add two weeks for processing of the claim and it can be up to six weeks from when you first made the payment to when it gets reimbursed.