Health Flexible Spending Account vs. Dependent Care Flexible Spending Account
Which pre-tax option is right for you?
Flexible Spending Accounts (FSAs) are not always cut from the same cloth. When you begin work with an employer who offers this benefit, you will have to make some difficult choices regarding your plan, especially if you and your spouse have children or family members at home to take care of.
The most common FSA is the HealthCare FSA (HCFSA) that covers common medical procedures, co-payments, prescription drugs and over-the-counter products. However, parents and caretakers may also consider the Dependent Care FSA (DCFSA), which covers childcare and and maybe even care for family members who are incapable of self-care.
Here’s how to figure out which option is ideal for your budget and any future expenses:
HealthCare FSAs (HCFSA)
Popular among single individuals and families alike, there’s a lot to love about medical FSAs and their ability to cover a huge range of medical products and services. An FSA holder can allocate up to $2,500 each year with regular payroll deductions that can be spent on everything from bandages to contact lenses to medical co-payments. Many workers have until December 31 of each year (a popular FSA deadline) to use these funds before they disappear, but some employers will adhere to the IRS’s grace period regulations that extend the deadline until March 31. Recent legislation also allows account holders to roll over up to $500 into the following year’s FSA if it is not spent by the deadline.
Aside from being able to purchase a wide variety of FSA eligible products, a HealthCare FSA is essentially a tax deduction that reduces your adjusted gross income (AGI) and the amount of money you pay in taxes each month. While the account does not cover insurance premiums, long-term care coverage or expenses from another health plan, it’s extremely versatile and has nearly unlimited uses for the modern family.
Dependent Care FSAs (DCFSA)
Families with small children or those who care for an elderly family member will find DCFSAs rather intriguing, as these accounts will cover eligible dependent expenses that can be very significant over the course of a year. A DCFSA will cover child care for children up to age 13, as well as day care for anyone you list on your federal tax return as a dependent who is physically or mentally incapable of providing for his or her own care. This money is intended to assist you with these expenses while you and your spouse are gainfully employed.
Additionally, parents who are looking into DCFSAs to cover childcare may also want to investigate the childcare tax credit. According to Baby Center, the IRS will refund up to 20 to 35 percent of up to $3,000 for one child, and $6,000 if you have two or more kids. These numbers are dictated by your AGI: individuals with an AGI of $15,000 or below will receive the full credit, while higher AGIs will have smaller tax credits as household incomes rise.
Which is ideal for my situation?
After going through the fine print of what each kind of FSA entails, you have to be honest about your financial situation and find out which plan offers the most value with your yearly take-home pay. For most people, choosing one or the other makes the most sense depending on their needs at home and yearly medical expenses. Ultimately, the more money you put into an FSA, the more you’ll be able to get out of it, which directly influences higher income individuals.
However, those who are at lower income levels may find that their best option is to avoid the FSA route altogether and instead opt for the IRS’s childcare tax credit for better overall value over the course of a year. After all, an FSA is only beneficial to those who have the money to allocate to it and needs over the course of a year to make it worthwhile and realize savings, so tax credits may prove to be more valuable for some working families.
Each of these routes has their own unique benefits and disadvantages, so it may be wise to sit down with a financial professional to effectively calculate which route will give you the biggest bang for your buck. You can also visit FSAstore.com and check out our FSA Calculator to get a better sense of your yearly health spending and how an FSA can factor into your future plans!