A Dependent Care Flexible Spending Account (FSA) is a tax-advantaged account that allows employees to set aside pre-tax income to pay for eligible childcare and dependent care expenses. The funds contributed to a Dependent Care FSA reduce an employee’s taxable income, providing significant tax savings.
Eligible expenses that can be paid with a Dependent Care FSA include:
- Daycare for children under age 13.
- Preschool tuition.
- Before- and after-school programs.
- Elder care for a dependent adult who lives with the employee.
For 2023, employees can contribute up to $5,000 per year to a Dependent Care FSA, or $2,500 if married and filing separately. Funds contributed to the FSA must be used by the end of the plan year, or they are forfeited under the “use it or lose it” rule.
By using a Dependent Care FSA, employees can reduce their taxable income and lower the amount of federal income tax, Social Security tax, and Medicare tax they owe. This is a valuable benefit for working parents or caregivers who need assistance with dependent care costs.