Monday, July 1, 2013


Do you participate in your employer’s Dependent Care Flexible Spending Account?  And will your under age 13 child be attending summer day camp?

You may be able to have the cost of the summer day camp paid by your Dependent Care FSA.

Participants in an employer-sponsored dependent care FSA set aside a specific dollar amount from their salary to pay for qualified child-care during the year. The maximum amount you can set aside for a dependent care plan is $5,000.

Monies set aside in a Flexible Spending Account are considered “pre-tax” for both federal income tax and FICA (Social Security and Medicare) tax purposes. If your annual salary is $50,000 and you set aside, and spend, $5,000 in an FSA, the federal wages reported in Box 1 on your Form W-2, as well as the Social Security and Medicare wages, will be $45,000. If you are in the 25% bracket, this $5,000 will save you $1,633 in federal income and FICA taxes.  So about 33% of the cost of child care paid via this account is “reimbursed” by your Uncle Sam.

If you state also treats Dependent Care FSA contributions as “pre-tax” your overall tax savings will be even greater.  FYI New Jersey does not treat FSA contributions as “pre-tax” on the NJ-1040.  The NJ state wages reported on a Form W-2 will not be reduced by your FSA contributions.

A Dependent Care FSA is a “use it or lose it” plan.  If you set aside $5,000 in the DCFSA, but spend only $4,000 on qualified expenses during the year, you lose $1,000!

If you do not use money from your FSA to pay for summer day camp you can claim a Credit for Child and Dependent Care Expenses of up to $3,000 if you have one child or up to $6,000 if you have two or more qualifying children.

In many cases the FSA provides a greater tax savings than the tax credit.  For most cases the credit is 20% (it can be higher for lower-income taxpayers) - so the maximum credit is usually $600 for one child or $1,200 for more than one.  As stated above, the maximum tax savings from a Dependent Care Flexible Spending Account could be $1,633.  Do the math and calculate your potential tax savings under each option before deciding what to do.

In either case be sure to get the Employer Identification Number of the summer camp.  You will need to enter this number, along with the name and address of the camp, on IRS Form 2441.  

Special rules apply if you are filing your tax return as Married Filing Separately.  MFS filers are limited to a $2,500 exclusion from taxable wages instead of $5,000 on the Form 1040.  And couples filing separately may not be able to claim a tax credit for child care expenses.   



Indy Taxman said...

I think you mean Form 2441, not 1116 since the 1116 is the Foreign Tax Credit Form & 2441 is the Child & Dependent Care Credit Form.

Robert D Flach said...



Good catch! You are correct. I have made the correction.


Anonymous said...

Can someone walk me through using the FSA in practical terms? I spent $1,100/month in day care (2 kids). Based on everything I read, because of the tax benefits, it would be advantageous to do the FSA. But if max is $5k, then my employer takes $192/pay out of pay check? But then each month, I'd some how transfer $384 from the FSA to daycare provider, but pay remaining $800 out of pocket? What about like December 21st paycheck. Employer takes out the $192, but I already paid Daycare for the month. I just lose it? since it doesn't roll over?

I want to take advantage of the tax break, but it all just seems like a pain to track/pay, etc. Am I making it out to be harder than it actually is? Thanks for any practical examples!

Robert D Flach said...


You are making it out to be harder than it actually is.

I have no personal experience with the workings of such a plan. But you should be able to either have the system pay your child care provider directly or reimburse yourself for payments you have made - so you would not lose any of your bi-weekly withholding.

In addition to the "pre-tax" treatment of the $5,000 for federal, probably state, and FICA taxes (at least Medicare) you will also get a tax credit based on $1,000 of excess costs.

I welcome any of my readers with personal experience of how such an FSA works to reply to Anon's questions.