Concerned about after-school care? Learn about two unexpected ways to save on after-school care via our blog.
Saving on after-school child care
With a new school year upon us, your daily to-do list is about to get much longer! Juggling the responsibilities of parenting and a career are hard enough, but after-school child care can give you the necessary reprieve to tackle your responsibilities.
Of course, that extra help doesn't come without a price! Child care expenses can add up over time, but there are a number of unexpected income sources you can tap to help cover this essential service.
Here are a few simple ways to save money from the experts at FSAstore.com:
- Cover expenses with a Dependent Care FSA
Flexible Spending Accounts (FSA) are extremely valuable in covering a wide range of potential expenses for you and your family, and they are available in a number of different forms. In this case, a Dependent Care Flexible Spending Account (DCFSA) will cover child care for kids up to age 13, in programs like summer school, as well as for 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, and best of all, it's tax-free!
2. Speak with HR
A growing number of businesses have started to see child care as a means of improving company culture and their employees' work-life balance. There may be some form of child care reimbursement or daycare benefits available that can help your family better handle the burden that working parents face. Your HR department can walk you through all the benefits available to you, or can be a helpful resource when setting up an FSA.
Have more questions about Dependent Care FSAs? Browse our Learning Center for questions about these popular plans.
Or, browse our Eligibility List to discover and search for covered expenses with different types of FSAs - including Healthcare FSAs, Limited FSAs and Dependent Care FSAs.
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!
Workplace benefits like Flexible Spending Accounts (FSAs) are well-known for their ability to cover a wide variety of medical services and products, but they can also provide a major boost for employees through year long tax savings. With April 15 (Tax Day) on the horizon, now is a great time of year to discuss the many tax benefits that come with FSAs and how they can put more money back into your pocket and alleviate your concerns when medical expenses pop up. Learn more about FSA eligible expenses via FSAstore.com.
How do FSAs affect my tax earnings?
According to Bank Rate, the vast majority of companies will offer one of two FSAs – a Dependent Care FSA that covers costs like day care and other child-related expenses while parents can work, look for work, or attend school full-time, and a medical FSA that covers routine medical expenses. In both cases, money is taken out of your salary with payroll reductions each month on a pre-tax basis. Simply put, these funds are placed into an FSA on a pre-tax basis, reducing taxable income and providing more savings in the long run.
Do I need to do anything extra around tax time?
While there is a lot of jargon and conflicting information out there, filing taxes with an FSA is extremely easy. It's important to remember, while you can use your FSA for countless medical products and services, the account is not really yours, but the employer's. While you don't need to add anything specific to your tax return, you should be mindful of how much money is available in your FSA, as well as what you'd like to spend/carry over to the next year.
Currently, employees can allocate up to $2,500 per year in their FSAs. If the FSA runs on a calendar year basis, FSA holders typically have a deadline to use their funds by December 31, or if an employer utilizes the IRS's grace period, this is extended to March 15. It's important to note that these grace periods are not required by the IRS, so it's vital to check with an employer to see if this policy is in place. Last but not least, thanks to a new U.S. Treasury Department ruling, employees may be permitted to roll over up to $500 of their FSA funds to the next year, which can allow them to better plan their spending each year.
Can I itemize my FSA expenses?
According to Tax Brain, employees who have an FSA can itemize their deductions come tax season, but they will not be able to apply their FSA expenses when itemizing. Remember, this money has been placed in the account on pre-tax basis, so this would be considered double-dipping. Another key point to remember is that medical expenses must be at least 10 percent of your adjusted gross income (AGI), to qualify as deductions.
Ultimately, by staying on top of your FSA funds, being aware of employer policies and spending wisely, FSAs can be extremely beneficial for your long-term budget. An FSA will change little when it comes time to file a tax return, but utilizing the benefit throughout the year and being mindful of allocations can help you realize major tax savings each year.
Q: What is a Dependent Care FSA? Who and what is covered?
A: A Dependent Care FSA (DCFSA) lets you use tax-free money to cover child care or adult dependent care. You or your spouse must be working, searching for work, or attending school full-time in order to qualify for the DCFSA.
Note: A Dependent Care FSA should not be confused with a Health Care FSA, which allows you to pay for qualified health care expenses.
Who is covered?
To qualify as employment-related expenses, care must be for a qualifying individual. A “qualifying individual” means:
-A dependent under age 13.
-The taxpayer's spouse. If the spouse is physically or mentally incapable of caring for himself or herself, and has the same residence as the taxpayer for more than half of the year.
-A dependent of the taxpayer (i.e., a qualifying child or qualifying relative could be an older relative) must be physically or mentally incapable of caring for himself or herself, and have the same residence as the taxpayer for more than half of the year.
*Individuals covered must be claimed as dependents on your federal income tax return. Read more specific details here.
Which expenses are covered?
- Before- and after-school care.
- Adult care of a relative who spends at least eight hours a day at your home.
- Child care at a day camp, nursery school, or by a private sitter (or by a non-tax dependent relative). Babysitters cannot also be claimed as dependents (an older relative must be at least 18 years old).
- Adult day care center.
- Transportation by caregivers.
- Expenses for a housekeeper who also handles dependent care.
- Day camps.
- Late pick-up fees.
Expenses not covered:
Any care that is not work-related will not be covered under your DCFSA.
-Long term care (nursing home)
-School tuition or education fees, meals or food.
Dependent Care Finances
The maximum you can contribute to a DCFSA per year is $5,000 per household, or $2,500 if married and filing separately. You will only be paid out for the amount available in your DCFSA (even if your actual dependent care expenses exceed that amount). Money from a DCFSA is only available to you once taken from your paycheck.
You cannot make a claim for dependent care expenses if you are unemployed. You or your spouse must earn income to qualify.
Details of the plan vary per employer. It's best to check in with your benefits administrator on what the limits, rules, and specifications for your DCFSA plan are. Your Summary Plan Description provides additional information.
Find out more about flex spending accounts via our FSA Learning Center.