Q. What is the advantage of using the Dependent Care Flexible Spending Account (DCFSA)?
A. Most people will save money, as shown on in the Examples of tax savings using the Plan, by using pre-tax dollars for eligible dependent care expenses.
Your dependents for the purposes of the DCFSA are:
- A child under age 13 if:
- You are entitled to claim the child as a dependent on your federal income tax return; or
- You have legal custody of the child for the longer portion of the year, even though you are not entitled to the federal income tax exemption.
- Your spouse who is physically or mentally unable to care for him/herself.
- Any other person who is physically or mentally unable to care for him/herself and who may be claimed as a dependent on your federal income tax return, or for whom you would be entitled to an exemption except that the person's income exceeded the exemption allowance.
The Internal Revenue Code (IRC) limits the amount you may direct to this account. You may contribute up to:
- $5,000 each year if you are:
- Married filing a joint federal income tax return; or
- Single filing a federal income tax return as a head of household.
- $2,500 each year if you are:
- Married filing separate returns; or
- Single and filing a return other than as a head of household.
- $3,000 each year for one dependent or $5,000 per year for two or more dependents if your spouse is a full-time student or disabled.
Please note: If you or your spouse earns less than $5,000 a year, you may direct no more than the earned income of the lower-earning spouse to this account. (For a spouse who is a full-time student at least five months of a calendar year, or who is disabled and temporarily unable to work, the Internal Revenue Code deems his or her earned income to be $250 a month if one family member is receiving care and $500 a month if two or more family members are receiving care.)
The Internal Revenue Code allows reimbursement only for expenses incurred during the months a spouse is a full-time student attending school during the day. Attending school at night does not meet Internal Revenue Code rules.
If you and your spouse both work, the combined annual maximum election is $5,000 (not $5,000 per person).
Availability of funds
There is a lag between the time funds are deducted from your pay and the time they are available for reimbursement.
Funds are credited to your account at the beginning of the month following the month they are deducted. For example, if you pay a care provider $200 on January 1 and direct $200 to your account during January, funds will be available to reimburse you in February.
Be sure to budget carefully because any unused amounts must be forfeited. For details about eligible and ineligible expenses, you may:
- Call Aetna Member Services to ask about specific expenses; or
- Refer to IRS Publication 503, Child and Dependent Care Expenses, available from the Internal Revenue Service and from the IRS Internet site at www.irs.ustreas.gov.
In general, the Plan lets you use pre-tax dollars to pay for the care of eligible dependents that allows you and your spouse, if married, to work outside the home. The care must be rendered during your normal working hours. To be reimbursable, expenses must be incurred during the plan year and while you are making contributions. Eligible expenses include charges for:
- Centers providing day care for children.
- Centers providing day care for dependent adults.
- Helping disabled dependents with dressing and other personal care.
- In-home care for children or dependent adults — expenses for dependent care and related household chores can be eligible when there is no clear-cut distinction between the two services. But if you pay one person to take care of a dependent, and another person to do household chores, only expenses for the care are reimbursable.
Expenses not eligible for reimbursement
Expenses must pay for care that allows you and your spouse to work outside the home. The following fail to meet the Internal Revenue Code criteria:
- Around-the-clock baby-sitting.
- Care allowing you or your spouse to attend meetings, participate in leisure time activities or take a vacation.
- Care allowing you or your spouse to attend school at night or on a part-time basis.
- Expenses for care provided by your own children under age 19 or by relatives you claim as dependents on your tax return.
- Full-time care in a nursing home.
- Miscellaneous charges by day care centers for things such as swimming lessons, meals and field trips.
- Private school tuition for kindergarten and beyond.
- Payment in advance of services not yet rendered.
Dependent care flexible spending account vs. federal tax credit
Federal law allows you to take a tax credit for eligible dependent care expenses. Under the Internal Revenue Code, the tax credit is an amount equal to a percentage of your dependent care expenses, currently limited to $3,000 for one dependent or $6,000 for two or more dependents. This amount may change from year to year and you should request this information annually from your tax advisor.
If you are considering using the DCFSA, you might want to also consider the effect of your participation on taking the tax credit. Here are your options:
- You may take the full tax credit allowed by the IRS;
- You may pass your expenses through the DCFSA; or
- You may use the spending account for a portion of your dependent care expenses and take the tax credit for the remaining amount.
Please note: If you use the DCFSA, the amount you contribute to your account reduces dollar for dollar the expenses against which you can claim a tax credit. If your DCFSA amount exceeds the available tax credit, you will not be able to take advantage of a tax credit for that year.
The example shown in the Examples of tax savings using the Plan offers a comparison of these options. The payment method that is best for you depends upon your individual situation. To help you determine whether the DCFSA or the tax credit is better for your particular situation, you may want to consult a tax specialist or contact the IRS to obtain Publication 503, Child and Dependent Care Expenses.