If you have young children, you already know that paying for child care can be one of the most expensive items in a family’s budget.
And it’s only getting more expensive. More than 60% of families with young children said that their child care costs went up this year, and more than half of families spent more than 20% of their income on child care, according to Care.com. That survey found that 58% of families surveyed planned to spend more than $10,000 in child care this year.
One way to offset such costs is by taking advantage of a dependent care flexible spending account, if your company offers one as part of its benefits.
What Is a Dependent Care FSA?
A dependent care FSA is a tax-advantaged account offered by many companies as part of their benefits package. If your company is among the 40% of employers that offer this benefit, you can put up to $5,000 per year into the account before taxes and take it out tax-free for qualified dependent care expenses. The $5,000 limit is per family, so married couples cannot both put cash into their FSAs.
[READ: Ways to Spend Child Tax Credit Payments.]
However, it’s important to think carefully about how much money you want to put into an FSA. If you don’t use all the funds for dependent care expenses by the end of the calendar year, you lose them.
“It’s well worth it to spend a little bit of time preparing for your annual enrollment upfront to figure out exactly what your spend is going to be over the next year before you make the election of how much to contribute,” says Steve Durso, associate director of benefit accounts at WTW.
[Read: What Is the Child Tax Credit?]
What Is Eligible for FSA?
You can use dependent care FSA funds for qualified child care expenses for children under age 13 while their parent or parents are working or looking for work. Eligible expenses include:
— In-home nannies or babysitting, as long as the recipients are paid on the books.
— After-school programs.
— Day camp (but not overnight camp).
— Daycare or nursery school.
You can also use the funds to cover care for children over age 13 with special needs, elderly parents or relatives whom you claim as dependents on your taxes.
“While many refer to these as childcare FSAs, you can use them for other types of care for dependents, such as senior care, adult day care or for the care of a family member that lives with you,” says Desiree Leung, head of operations at Care.com HomePay.
[Read: How Much Does It Cost to Raise a Child?]
What Is Better: Dependent Care FSA or Child Care Tax Credit?
While the child and dependent care tax credit offers benefits that are similar to the dependent care FSA, there are some important differences. With the child care tax credit, you can claim up to 35% of $3,000 in dependent care expenses (the same rules apply as above) per child or $6,000 for two children.
Families with one child will come out financially ahead by maxing out their dependent care FSA first, Leung says. Depending on your tax bracket, that can save you up to $2,000, depending on your marginal tax bracket, but the child and dependent care tax credit is a good option for those whose employers don’t offer a dependent care FSA.
If you have two or more children and access to a dependent care FSA, you can get the largest possible tax benefit by putting $5,000 into your workplace FSA and an additional $1,000 worth of expenses toward the child and dependent care tax credit, Leung says.
More from U.S. News
What Parents Should Know About Children and Taxes
Smart Ways to Gift Money to Children
Ways to Save for Your Child’s College Education
What Is a Dependent Care FSA? originally appeared on usnews.com
Update 10/06/22: This story was previously published at an earlier date and has been updated with new information.
