A Dependent Care Flexible Spending Account (FSA) allows you to direct part of your pay, on a pretax basis, into a special account that can be used throughout the year to reimburse yourself for certain eligible dependent care expenses.
An eligible dependent is defined as a child under age 13 or any person living with you whom you claim as a dependent and who is physically or mentally incapable of self-care. This person must live with you more than half of the tax year and can not have an income of more than $3,200 per year. (Income limit based on 2005 tax filing.)
Currently, the IRS allows you to contribute up to $5,000 per year ($2,500 per year if married and filing separately) to a Dependent Care FSA for work-related dependent care expenses.
Estimate what your daycare expenses will be for the year, and allocate enough from your pay to cover them.
If you elect to take advantage of a Dependent Care FSA, you must complete IRS Form 2441 when filing your income taxes for the year. Your employer will report all dependent care contributions in Section 10 of your W-2 Form(s).
Your actual savings will depend on several factors, including your income, tax bracket and yearly dependent care expenses. For example, assuming an annual income of $40,000, a 15% tax bracket, and estimated dependent care expenses of $5,000, your tax savings will be approximately $472 annually by using a Dependent Care FSA.
With FSA
Without FSA
FSA Savings
Annual
Income:
$40,000
$40,000
Estimated
Dependent Care pretax contributions:
$5,000
$0
Taxable
Income:
$35,000
$40,000
Estimated
Federal Withholding:
$4,713
$5,463
Estimated
FICA:
$2,678
$3,060
Dependent
Care Expenses (without FSA):
$0
$5,000
Tax
Credit for Dependent Care
$0
$660
Net Pay:
$27,609
$27,137
$472
Filing Status: Head of Household with one dependent. These projections are only estimates of 2006 tax information and should not be assumed to be tax advice.
You pay your caregiver directly and get a receipt. Complete a Dependent Care Reimbursement Claim form and attach the receipt or have the caregiver sign the form. Send it in as instructed on the form, and we will send you a check (or direct deposit) for your eligible expenses.
Under IRS regulations, you can only be reimbursed for incurred expenses. For example, you can submit January's dependent care expenses in February for reimbursement.
How Does it Work?
(12 pages)
