A Dependent Care FSA pays for childcare and adult care expenses using money you set aside before taxes are taken out of your paycheck

A Dependent Care FSA (also called a Dependent Care Account) works like your regular FSA, except the money goes toward care costs instead of medical bills. You decide how much to contribute each year, your employer deducts that amount from your paycheck before income tax and Social Security tax are calculated, and you use a debit card or submit receipts to get reimbursed for may have access to expenses.

The main benefit is the tax savings. If you contribute $5,000 to a Dependent Care FSA and you're in the 22% federal tax bracket, you save roughly $1,100 in taxes that year. You also avoid paying Social Security and Medicare taxes on that money. The catch is the same as with a regular FSA: money you don't use by the end of the plan year is forfeited, with a small carryover allowed in some plans.

Dependent Care FSAs are offered through your employer's benefits plan. You enroll during open enrollment or when you first become may be able to access (usually within 30 days of hire or a may have access to life event like the birth of a child). The money comes directly from your paycheck, so there's no separate application to a government agency.

Key Takeaways

  • You contribute pre-tax dollars to a Dependent Care FSA, which reduces your taxable income and the taxes you owe.
  • The account covers childcare, preschool, after-school programs, and care for elderly or disabled dependents, but not school tuition or overnight camps.
  • You must have earned income and a may have access to dependent to open an account, and your spouse's income counts if you're married filing jointly.
  • Unused money is forfeited at the end of the plan year, though some employers allow up to $570 to carry over into the next year.
  • You can change your contribution amount only during open enrollment or after a may have access to life event like a birth, adoption, or job change.

What expenses a Dependent Care FSA actually covers

The IRS defines may have access to expenses narrowly. The account covers the cost of care that allows you and your spouse (if married) to work or attend school full-time. This includes daycare centers, in-home nannies, babysitters, preschool, after-school programs, and adult day care for an elderly or disabled parent or spouse.

The care must be for a dependent under age 13, or for a spouse or parent who is physically or mentally unable to care for themselves. If you're single and your parent lives with you and depends on you financially, their care costs may have access to. If you're married, both spouses must be working or in school for the expenses to count.

Expenses that do not may have access to include overnight camps, tuition at elementary school or higher (even if the school provides childcare), summer school, babysitting while you shop or go on vacation, and care provided by your spouse or a dependent child. You also cannot use the account for care provided by someone you claim as a dependent on your taxes, or by your child under age 19.

How much you can contribute and the annual limit

The IRS sets an annual limit on Dependent Care FSA contributions. For 2024, the limit is $5,000 per household per year if you're married filing jointly or single, and $2,500 if you're married filing separately. Your employer may set a lower limit, so check your plan documents.

The contribution limit is based on your household's earned income. If you earn $40,000 and your spouse earns $30,000, your household earned income is $70,000, and you can contribute up to $5,000. If only one spouse works, the limit is capped at that spouse's income. If you earn $3,000 and your spouse doesn't work, you can contribute only $3,000 to the account.

You choose your contribution amount during open enrollment, and it's deducted evenly from each paycheck. If you have a may have access to life event—a birth, adoption, marriage, divorce, or significant change in childcare costs—you can change your contribution mid-year. A job loss or reduction in hours also qualifies as a life event that allows you to lower your contribution.

How to use the money and get reimbursed

Most employers issue a debit card linked to your Dependent Care FSA account. You swipe it at the childcare provider when you pay, and the money comes directly from your account. Some providers, like daycare centers, may accept the card directly. Others may require you to pay out of pocket and submit a receipt for reimbursement.

To get reimbursed, you submit an expense claim through your employer's benefits portal or by mail. You'll need to provide an itemized receipt showing the provider's name, the dates of care, the amount paid, and what the money was for. Some employers use a third-party administrator to process claims, and they may ask for additional documentation like a signed agreement with a nanny or proof that the provider is licensed.

Reimbursement typically takes one to two weeks after you submit a complete claim. Keep all receipts for at least three years in case your employer or the IRS audits your account. If you submit a claim for an expense that doesn't meet IRS rules, you'll be asked to repay the reimbursement, and that money will be added back to your taxable income.

The use-it-or-lose-it rule and carryover options

Money left in your Dependent Care FSA at the end of the plan year is forfeited. This is the biggest risk of the account. If you contribute $5,000 and use only $4,200, the remaining $800 is gone. You cannot roll it over to the next year or get it back as a refund.

Some employers offer a limited carryover: you can carry up to $570 (for 2024) into the next plan year. This amount changes annually with inflation. If your plan allows carryover, you have until the end of the grace period (usually March 15 of the following year) to use the carried-over funds. Check your plan documents to see if carryover is available.

Because of this rule, estimate conservatively. If your childcare costs vary month to month, aim for an amount you're confident you'll spend. Some people contribute less than the maximum to reduce the risk of forfeiting money. Others track their spending carefully throughout the year and adjust their estimate if their childcare needs change.

Life events that let you change your contribution

You can change your Dependent Care FSA contribution only during open enrollment or after a may have access to life event. The IRS defines these narrowly, and your employer must approve the change within 30 to 60 days of the event.

may have access to events include: birth or adoption of a child, death of a dependent, marriage or divorce, a significant change in your childcare costs or provider (such as a daycare closing or a nanny quitting), a change in your spouse's work schedule that affects childcare needs, loss of childcare subsidy from a government program, and a change in your dependent's school schedule. A job change or job loss also qualifies if it affects your ability to work or your household income.

If your childcare costs increase—for example, your daycare raises its rates—you can increase your contribution. If costs decrease, you can lower it. You cannot change your contribution simply because you want to save more or less money. The change must be tied to a specific event that affects your need for care or your ability to pay for it.

Tax implications and what happens if you over-contribute

The money you contribute to a Dependent Care FSA reduces your taxable income, which lowers your federal income tax, Social Security tax, and Medicare tax. If you contribute $5,000, your taxable income drops by $5,000, and you pay taxes on a lower amount.

However, contributing to a Dependent Care FSA may affect your ability to claim the Dependent Care Credit on your tax return. The credit allows you to deduct a percentage of childcare expenses from your taxes, but you cannot claim the credit for expenses you've already paid with pre-tax FSA money. Your tax preparer or the IRS Form 2441 instructions will help you determine which option saves you more money in your specific situation.

If you contribute more than you spend, the excess is forfeited (unless your plan allows carryover). If you spend more than you contribute, you pay the difference out of pocket. There is no penalty for underfunding your account; you simply don't get the tax benefit for expenses you pay with after-tax money.

Frequently Asked Questions

Can I use a Dependent Care FSA if I'm self-employed?

No. Dependent Care FSAs are offered only through employer-sponsored benefits plans. If you're self-employed, you may be able to deduct childcare expenses as a business expense or claim the Dependent Care Credit on your tax return, but you cannot open an FSA. Some small business owners who have employees can set up a Dependent Care FSA as a benefit for their staff.

What happens to my Dependent Care FSA if I leave my job?

Your account closes when you leave your employer. You have a limited time (usually 60 days) to submit claims for expenses you incurred before your last day of work. Any unused balance is forfeited. If you move to a new job with a Dependent Care FSA, you can enroll in that plan during your may be able to access period, but you start with a new account and a new contribution limit.

Can my spouse and I each open a Dependent Care FSA at our separate jobs?

No. The IRS limit of $5,000 per household applies to both of you combined, not to each of you separately. If you each contribute to an FSA at your respective employers, your combined contributions cannot exceed $5,000 per year. You must coordinate with your spouse to avoid exceeding the limit and facing tax penalties.

Does a Dependent Care FSA cover my child's school tuition?

No. School tuition does not may have access to, even if the school provides before-school or after-school childcare. However, the cost of a separate after-school program or daycare center does may have access to. If your child attends school and you pay for care before or after school hours, only the care portion of the bill qualifies, not the tuition.

What if I don't use all my money by the end of the year?

The unused balance is forfeited. Some plans allow you to carry over up to $570 into the next year, but most do not. This is why it's important to estimate your childcare costs carefully and contribute only what you're confident you'll spend. If your costs decrease during the year, you can request a mid-year change if you have a may have access to life event.