Earlier this year, I heard news that the limit for dependent care FSA (flexible spending account) would increase from $5,000 to $10,500. If you, like me, work for the Federal government, this benefit is available until June 30th. Also if you are spending a crazy amount of money for childcare and your employer offers a dependent care FSA (DCFSA) you’ll want to take advantage of this temporary change.
Tax advantage
First of all, I am not a financial advisor. You should consult with your accountant or financial advisor for tax or financial advice. I’m just sharing my experience.
The DC metro area is an expensive place to live compared to other parts of the country. It takes more income to afford to live around here, which means a higher tax burden. During normal times, when the dependent care FSA limit was $5000, and I took it to the max, I saved an estimated $1,500 in taxes. The increased limit means I could save $3,000 in taxes.
There are some pitfalls. For one, the $10,500 limit may only be good for 2021. It would be nice if it was permanent, but as far as we know, it isn’t. One pitfall to be aware of is the grace period to carryover some amounts from 2021 to 2022. The Society for Human Resource Management has an article pointing out some concerns for employees and employers.
In normal times, pre-COVID, we spent well over $16,000 a year for childcare at a child development center. That was just for one kid. With our move out of the District of Columbia, and losing the free Pre-K we knew we’d probably spend the same amount or more this year. So our family will probably not have any money left to carry over.
How childcare refunds work
I can only speak about my own experience. Unlike my health care FSA, I have to wait for the DCFSA account to get funded before I can get refunded. In order to fund my DCFSA, it takes a huge chunk out of my paycheck. But if I have an approved claim that hadn’t been paid yet, I tend to get my money back the same day my paycheck is direct deposited into my account. There are other options where the childcare provider could be refunded, but I’m unfamiliar with this method.
Our daycare was the bulk of our reimbursed expenses, but there are other covered expenses. DCFSAs cover after school care, Summer and holiday camps for dependents under 13, preschool tuition, and late-pick up fees. For many nanny care situations it covers nanny and au pair costs, such as payroll taxes. I’ve been able to get my provider to sign a form or I’ve submitted receipts or other proof of payment.
The deadline for Federal workers is coming at the end of June. The DCFSA has been useful for my husband and I as two working adults and parents. I enjoy the tax savings. It is a worthwhile benefit to parents and I urge you to take advantage of this temporary change.