A Dependent Care FSA (DCFSA) is a pre-tax benefit account used to pay for eligible dependent care services, such as preschool, summer day camp, before or after school programs, and child or adult daycare.
Dependent day care FSAs allow you to pay for eligible dependent day care expenses on a pre-tax basis.
Using a DCFSA to reduce your taxes
A dependent care FSA is a great strategy to reduce your tax burden.
Dependent care funds are withdrawn from your paycheck for deposit into your account before taxes are deducted, so you end up paying less in taxes and taking home more of your paycheck.
Another method to subsidize care expenses
The child and dependent care tax credit (CDCTC) provides a credit worth between 20-35% of child care costs for a child under age 13 or any dependent physically or mentally incapable of self-care.
To qualify for the CDCTC, a single parent must be working or in school. For married couples, both adults must be working or attending school.
If a family has child care expenses that exceed the amount set aside in a flexible spending account, the family may qualify for a CDCTC.
First, families calculate their allowable CDCTC expenses ($3,000 per child under age 13, up to $6,000 per family).
If this calculation exceeds the amount of salary set aside in an FSA, a parent may claim a CDCTC based on the difference.
For example, a family with two or more children can qualify for up to $6,000 of expenses to apply toward a CDCTC. If that family excluded $5,000 from salaries to pay for child care expenses in an FSA, it may claim the difference between the two ($1,000) as child care expenses for a CDCTC.