What a Dependent Care FSA Pays For

A Dependent Care FSA is a workplace account that lets you set aside pre-tax money to pay for childcare, adult daycare, or care for a disabled family member while you work. The money comes out of your paycheck before taxes are taken, which lowers your taxable income for the year. Your employer holds the account and you spend from it by submitting receipts or using a debit card, depending on how your plan is set up.

The account covers daycare centers, in-home babysitters, preschool, after-school programs, and adult day programs for aging parents or disabled relatives. It does not cover overnight care (like boarding school or nursing homes), summer camps that are primarily recreational, or school tuition for kindergarten and above. Some plans cover before- and after-school care at a school your child attends, but not the tuition itself.

You can only use the money for care that allows you or your spouse to work, go to school, or look for work. If you stay home, the account does not apply to your situation.

Key Takeaways

  • A Dependent Care FSA holds pre-tax money you set aside from your paycheck to pay for childcare or adult care while you work.
  • The account covers daycare centers, babysitters, preschool, and adult day programs, but not overnight care, camps, or school tuition.
  • You must submit receipts or use a debit card to spend the money, and your employer controls the account.
  • Any money left in the account at the end of the year is forfeited — you cannot carry it over or get it back.
  • You can contribute up to $5,000 per year (or $2,500 if married and filing separately), though your employer may set a lower limit.

How Much You Can Contribute and How It Reduces Your Taxes

The federal limit for 2024 is $5,000 per year if you are single or married filing jointly, or $2,500 if you are married filing separately. Your employer may allow less than the federal limit. You decide how much to contribute when you enroll, usually during your company's open enrollment period each year.

Because the money comes out before taxes, you pay no federal income tax, Social Security tax, or Medicare tax on it. If you earn $50,000 and contribute $5,000 to a Dependent Care FSA, your taxable income drops to $45,000. The tax savings depend on your tax bracket — someone in the 22% bracket saves about $1,100 on a $5,000 contribution, while someone in the 12% bracket saves about $600.

You cannot change your contribution amount during the year unless you have a may have access to life event: birth or adoption of a child, change in your spouse's employment, significant change in childcare costs, or change in your childcare provider. Divorce, marriage, or a child aging out of daycare are also may have access to events.

The Use-It-or-Lose-It Rule and How to Avoid Losing Money

Any money left in your Dependent Care FSA at the end of the plan year is forfeited — you cannot carry it over to the next year or withdraw it. This is called the use-it-or-lose-it rule, and it applies to most FSAs. Some employers offer a grace period of up to 2.5 months into the next year to spend remaining funds, but this is optional and not all plans include it.

Because of this rule, you should estimate your childcare costs carefully before you contribute. If you know you will spend $4,000 on daycare next year, contribute $4,000, not $5,000. If your costs are unpredictable — for example, you use daycare only during the school year — contribute a conservative amount and plan to spend it all by December 31.

If you have money left over and your plan does not offer a grace period, you lose it. There is no way to recover it or roll it into the next year. This is why many people contribute less than the federal limit: the risk of losing money outweighs the tax savings.

How to Spend the Money and What Proof You Need

Your employer provides either a debit card linked to the account or a reimbursement process. With a debit card, you swipe it at the childcare provider and the charge comes directly from your FSA. With reimbursement, you pay out of pocket and submit an invoice or receipt to your employer to get paid back.

You will need to provide proof of the expense: an invoice from the daycare center showing the dates of care and the amount charged, a receipt from a babysitter with their name and the dates worked, or a statement from an adult day program. The provider's tax ID number or Social Security number is usually required as well. Your employer's plan documents will specify exactly what documentation they accept.

Reimbursement typically takes one to two weeks after you submit the paperwork. If you use a debit card, the charge is immediate, but you may still need to provide documentation later if your employer audits the account. Keep all receipts for at least three years in case of an IRS audit.

Who Can Be Claimed as a Dependent for This Account

You can use the account for your own children under age 13, your spouse's children under age 13 (if you are married), or any relative you claim as a dependent on your tax return who is physically or mentally unable to care for themselves. This includes adult children with disabilities, aging parents, or siblings with special needs, as long as they live with you for more than half the year and you provide more than half their financial support.

The person receiving care must have a Social Security number or Individual Taxpayer Identification Number (ITIN). You cannot use the account for care of a child age 13 or older, even if they are your dependent, unless they have a disability that qualifies them.

If you are divorced or separated, only the parent with custody can claim the child in the FSA. If you share custody, the parent who has the child for more of the year can claim the expenses.

Dependent Care FSA Versus Other Tax-Advantaged Options

If your employer does not offer a Dependent Care FSA, you may be able to claim the Child and Dependent Care Credit on your tax return instead. This credit lets you deduct a portion of childcare expenses from your taxes, but it is less valuable than an FSA because you do not get the pre-tax savings. The credit covers up to $3,000 in expenses per year and returns 20% to 35% of that amount, depending on your income.

Some states offer their own dependent care tax credits or subsidies for low-income families. These can be combined with a Dependent Care FSA in some cases, but the rules vary by state. If you earn below a certain threshold, a state subsidy may save you more money than an FSA.

If you are self-employed or your spouse is self-employed, you cannot use a Dependent Care FSA through that business, but you can still claim the Child and Dependent Care Credit on your tax return.

What Happens to Your Account If You Leave Your Job

When you leave your job, your Dependent Care FSA account closes. Any money remaining in the account is forfeited — your employer does not transfer it to a new account or refund it to you. This is true even if you leave mid-year and have contributed significantly more than you have spent.

If you move to a new job with a different employer that offers a Dependent Care FSA, you can enroll in that plan during your new employer's open enrollment or within 30 days of your hire date. You start with a new account and a new contribution limit. There is no carryover from your previous employer's plan.

If you are laid off or fired, you may be able to continue your FSA under COBRA (Consolidated Omnibus Budget Reconciliation Act), but you will have to pay the full premium yourself, including the employer's share. COBRA continuation is usually expensive and lasts only 18 months, so many people do not choose it for an FSA.

Frequently Asked Questions

Can I use a Dependent Care FSA for my nanny or babysitter?

Yes, as long as the person is not a relative you claim as a dependent and they are not your spouse. You will need their name, address, and Social Security number or ITIN. The nanny or babysitter does not have to be licensed or work for an agency — individual caregivers count.

What if my childcare costs are lower than I expected and I have money left over?

Any unused balance is forfeited at the end of the plan year. Some employers offer a grace period of up to 2.5 months into the next year to spend it, but most do not. If you think your costs will be lower, contribute less to avoid losing money.

Can my spouse and I both have Dependent Care FSAs?

No. If you are married, you can have only one Dependent Care FSA between the two of you, and the combined contribution limit is $5,000 per year. You must decide which employer's plan to use. If both employers offer plans, you choose one.

Does the Dependent Care FSA affect my income for purposes of other benefits?

No. The FSA contribution reduces your taxable income for federal tax purposes, but it does not count as income for means-tested programs like Medicaid, SNAP, or subsidized childcare. This is one advantage over the Child and Dependent Care Credit, which can affect your modified adjusted gross income for some programs.

What if I get divorced or my childcare arrangement changes mid-year?

Divorce, a significant change in childcare costs, or a change in your childcare provider are all may have access to life events. You can change your contribution amount within 30 to 60 days of the event (depending on your employer's plan). If your costs drop, you can lower your contribution to avoid forfeiting money.