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Started By
Message
Need some help understanding Dependent Care FSA
Posted on 11/7/19 at 10:23 am
Posted on 11/7/19 at 10:23 am
I'm looking at opening a Dependent Care FSA during my agency's open enrollment period, so I'm doing a lot of research and hoping someone here can help me get a better understanding of the full benefit here.
Our yearly expenses are about $6800 for daycare for one child. This will be going up next year, as we will have a second child (newborn) going into daycare in July. The FSA maximum is $5000/yr, at $192/paycheck. The calculator on the website indicates we would save $1400/yr (on taxes I assume) by using the FSA.
I'm just having trouble wrapping my head around those figures. Obviously, it is still going to cost us about $1800 out-of-pocket to cover the remainder of the bill, which bothers me a little because my paychecks are going to be somewhat smaller by making use of the FSA, but I also realize it's pre-tax so it's not like taking $192 out of my net pay either.
Can anyone offer advice on how I need to look at this to actually wrap my head around it? I've played around with a few paycheck calculators to see the difference, but they are off on some of the calculations (I know this because I ran my current pay stub through it, and FICA, Medicaid, and state are off by about $10), so I'm not sure how much I can rely on that.
Our yearly expenses are about $6800 for daycare for one child. This will be going up next year, as we will have a second child (newborn) going into daycare in July. The FSA maximum is $5000/yr, at $192/paycheck. The calculator on the website indicates we would save $1400/yr (on taxes I assume) by using the FSA.
I'm just having trouble wrapping my head around those figures. Obviously, it is still going to cost us about $1800 out-of-pocket to cover the remainder of the bill, which bothers me a little because my paychecks are going to be somewhat smaller by making use of the FSA, but I also realize it's pre-tax so it's not like taking $192 out of my net pay either.
Can anyone offer advice on how I need to look at this to actually wrap my head around it? I've played around with a few paycheck calculators to see the difference, but they are off on some of the calculations (I know this because I ran my current pay stub through it, and FICA, Medicaid, and state are off by about $10), so I'm not sure how much I can rely on that.
This post was edited on 11/7/19 at 10:24 am
5
Posted on 11/7/19 at 10:39 am to Cowboyfan89
You put the $ into the dependent care FSA before taxes. If you do the maximum of $5000/year it would be $208/paycheck if paid 2x/mo or $192/paycheck if paid bi-weekly. These funds go into a designated account. You can make a claim to request funds once you receive an invoice from your daycare, or you can wait until the end of the year if you only want to make one claim.
If you're already spending $6800 on daycare with additional expenses on the horizon (congratulations!) then I highly recommend utilizing this benefit your employer offers. You're able to pay the first $5000 of daycare with pre-tax money - it should also lower your taxable income as well.
If you're already spending $6800 on daycare with additional expenses on the horizon (congratulations!) then I highly recommend utilizing this benefit your employer offers. You're able to pay the first $5000 of daycare with pre-tax money - it should also lower your taxable income as well.
This post was edited on 11/7/19 at 10:46 am
Posted on 11/7/19 at 10:46 am to GulfCoastPoke
quote:
You can make a claim to request funds once you receive an invoice from your daycare, or you can wait until the end of the year
I used to be in one but the funds had to be in the account for the FSA administrator to pay the claim. So if I maxed out my FSA and burned through it in 7 months, I wouldn’t get fully repaid until the end of the year. Kind of a pita, unlike the health spending accounts (not health savings accounts) which advance the funds to you no matter how much you’ve put in yet.
Posted on 11/7/19 at 10:46 am to Cowboyfan89
It is as simple as you are taking an expense you have to pay with after tax dollars and paying it instead with pretax dollars. The savings is whatever your top tax bracket rate is X the amount you are able to put in the FSA. There is zero reason for you not to do it that I can see.
Posted on 11/7/19 at 11:04 am to Cowboyfan89
Be aware that both you and your spouse have to work to be eligible. This catches some people off guard when the wife doesn't go back to work after the second child.
Posted on 11/7/19 at 11:52 am to meeple
Yes that is a good point. I usually do mine all at once at the end of the year for this very reason.
Posted on 11/7/19 at 12:42 pm to frankthetank
quote:I don’t think this is true at all.
Be aware that both you and your spouse have to work to be eligible. This catches some people off guard when the wife doesn't go back to work after the second child.
Posted on 11/7/19 at 12:46 pm to buckeye_vol
quote:
I don’t think this is true at all.
The whole purpose on an Dependent Care FSA is to reimburse for work-related dependent care expenses.
LINK
quote:
If you’re married, both you and your spouse must be working, be a full time student, actively looking for work or incapable of self-care
IRS applicable rules (pdf)
This post was edited on 11/7/19 at 12:48 pm
Posted on 11/7/19 at 1:01 pm to Cowboyfan89
From what I understand regarding dependent care is that the IRS gives you two options. Realize the tax benefits during the year (enrolling in Dependent Care FSA) or receive the deduction when you file your taxes.
Posted on 11/7/19 at 1:10 pm to meeple
quote:
So if I maxed out my FSA and burned through it in 7 months, I wouldn’t get fully repaid until the end of the year.
Yes, you can only take out what you put into the FSA account, but once you have maxed out your claim allowance the money is then simply taken from your paycheck pre-tax, deposited into the FSA account, and then sent directly to your bank account in a separate transaction.
You don't "lose" any money throughout the year, you just don't have access to it on Jan 1.
That's how mine work anyway. An extra $96 is deposited weekly once the money hits the FSA account from my paycheck.
This post was edited on 11/7/19 at 1:12 pm
Posted on 11/7/19 at 1:16 pm to Oizers
Yes my understanding is also that if you are doing fsa there’s a tax credit you no longer qualify for.
I think in most cases you still save a bit with fsa.
I think in most cases you still save a bit with fsa.
Posted on 11/7/19 at 1:18 pm to Oizers
quote:
From what I understand regarding dependent care is that the IRS gives you two options. Realize the tax benefits during the year (enrolling in Dependent Care FSA) or receive the deduction when you file your taxes.
Not necessarily (from what I understand anyway). The Dependent Care Tax Credit and DC FSA can both be used if you have more than one child AND expenses exceed the $5000 allowed under the FSA. So you can only make a claim for the DCTC on $1000.
To my knowledge, our accountant has never filed our taxes with the DCTC, but we have had the Child Tax Credit, which isn't dependent on either of these apparently. We are leaving about $600 on the table each year by not claiming it though, so that's probably something I need to discuss with our accountant.
Posted on 11/7/19 at 1:24 pm to Cowboyfan89
See if the FSA plan has a debit card option. Mine had that. For my first kid, I had a deal with my preschool where they would charge my card for the 2nd and 4th Monday of the month, and I would give them a check for the 1st, 3rd, and 5th (when applicable) Monday of the month. That usually resulted in some money being left in the account towards year end, so I would just make a claim at the end of the year for the balance left over.
When the second kid came around, we did the same thing, except I would have to give them a (smaller) check on the 2nd and 4th Mondays, since 208.33 wasn't enough to cover 2 kids for the week.
If you don't have access to an FSA debit card, then it does become a bit of a timing issue... since you have to have the payroll deduction, write the checks, make the claim, and get the payroll deduction back as a claim payment. Like another poster said, some places will let you "build a claim balance" and as the money hits the FSA account, they can route it back to you in a couple of days. But it does kind of monkey with your cash flow a bit, so it's something you need to pay attention to and plan for.
When the second kid came around, we did the same thing, except I would have to give them a (smaller) check on the 2nd and 4th Mondays, since 208.33 wasn't enough to cover 2 kids for the week.
If you don't have access to an FSA debit card, then it does become a bit of a timing issue... since you have to have the payroll deduction, write the checks, make the claim, and get the payroll deduction back as a claim payment. Like another poster said, some places will let you "build a claim balance" and as the money hits the FSA account, they can route it back to you in a couple of days. But it does kind of monkey with your cash flow a bit, so it's something you need to pay attention to and plan for.
Posted on 11/7/19 at 1:37 pm to LSUFanHouston
I'm leaning more towards the idea of just making the claim at the end of the year, or maybe a few times a year, as opposed to every time. I think from a budget standpoint, it's not going to kill us if we don't immediately get the money back in the bank account, especially since--if the calculators are correct anyway--I'm only looking at a net decrease of about $120-130/paycheck. All that will do is cut into discretionary spending. Easy fix.
Posted on 11/7/19 at 2:07 pm to frankthetank
quote:This is the pertinent heading that you missed:
If you’re married, both you and your spouse must be working, be a full time student, actively looking for work or incapable of self-care
quote:The Child and Dependent Care Tax CREDIT is not the same as the Dependent Care Flexible Spending Account.
Can You Claim the Credit?
Posted on 11/7/19 at 2:42 pm to buckeye_vol
quote:
The Child and Dependent Care Tax CREDIT is not the same as the Dependent Care Flexible Spending Account.
Both the dependent-care FSA and the tax credit have the same eligibility requirements: The care must be for a child under age 13 while you and your spouse work (both spouses must have earned income, or one can be a full-time student).
Posted on 11/7/19 at 2:47 pm to frankthetank
We do this for the $5k a year through my wife's employer. She literally receives a check for $416 each month, or the money that was deposited into the FSA.
Obviously we have to prove at the beginning (or maybe end) of the year the funds that were paid to a specific daycare.
I may be somewhat wrong on the specifics of the process, but that is what we see.
If you both work and have kids in daycare, there is no reason not to take advantage of this.
Obviously we have to prove at the beginning (or maybe end) of the year the funds that were paid to a specific daycare.
I may be somewhat wrong on the specifics of the process, but that is what we see.
If you both work and have kids in daycare, there is no reason not to take advantage of this.
This post was edited on 11/7/19 at 2:48 pm
Posted on 11/7/19 at 3:33 pm to frankthetank
quote:
Both the dependent-care FSA and the tax credit have the same eligibility requirements: The care must be for a child under age 13 while you and your spouse work (both spouses must have earned income, or one can be a full-time student).
Maybe the one available to me is different, but there is no work requirement for spouses. Makes sense since it can be used to care for a spouse as well.
ETA: nvm. It does...lol. had to go to the FAQ page to find it.
This post was edited on 11/7/19 at 3:35 pm
Posted on 11/7/19 at 7:10 pm to frankthetank
quote:It appears you’re right, and I was wrong. It just seems like the enforcement is a lot harder to institute when coming out of one spouse’s plan than the tax credit.
Both the dependent-care FSA and the tax credit have the same eligibility requirements
Then again, if my wife was working (or myself for that matter), we wouldn’t be paying for childcare like we do now, so we wouldn’t have the FSA. So I guess never considered the implications of using one and (inexplicably) paying for childcare expenses, unless a spouse is on disability or something.
Posted on 11/8/19 at 9:17 am to buckeye_vol
quote:
It just seems like the enforcement is a lot harder to institute
If you have Dependent Care Benefits (Dependent care FSA) you have to complete page 2 of Form 2441. On there, you list taxpayer earned income on Line 18, and Spouse earned income on line 19. If your spouse has no earned income (or earned income less than the amount of benefits), it will get caught up here and those benefits end up being taxable.
Every year I have one or two clients get tripped up by this. It's usually nothing nefarious... it's just usually one spouse stops working early in the year (before they earn $5,000), and the other spouse doesn't stop funding the dependent care FSA. They continue to send the kids to pre-school (especially if they are 3 or 4 years old). They don't realize that the contributed amounts are now taxable.
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