How to Use a Dependent Care FSA to Lower Child Care Costs

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For many parents of young children, child care represents one of the largest items on their household budget. The average cost of child care was more than $11,500 in 2023, according to an analysis by Child Care Aware, a nationwide network of child care referral agencies. In some high-cost cities, parents are spending more on child care than they are on their rent or mortgage payments.

A dependent care flexible spending account, which most major employers offer as a benefit, is one of the most effective ways to lower your child care costs. A dependent care FSA allows you set aside as much as $5,000 a year in pretax money for a variety of dependent care expenses. Contributions to the account, which are deducted from your paycheck, are exempt from federal income taxes and payroll taxes and may bypass state income taxes as well.

Dependent care FSA: How it works

Contact your human resources department to determine whether your employer offers a dependent care FSA. You’ll need to sign up during your employer’s benefits open-enrollment period, which usually occurs near the end of the year, unless you experience a qualifying life event, such as having a child, divorcing your spouse or experiencing a significant increase in the amount your child care provider charges.

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Generally, to be eligible for a dependent care FSA, you and your spouse (if you’re married) must be employed — or one of you can be a full-time student — and you must pay for care for one or more children younger than 13. You can use the money to pay for a babysitter or nanny, as well as before- and after-school programs and summer day camp, while you work or search for a job.

You can also use funds from a dependent care FSA to pay the costs of caring for an elderly or disabled relative if the individual lives with you at least eight hours a day, is claimed as a dependent on your tax return, and is incapable of caring for himself or herself. Eligible expenses include the cost of a personal care attendant or an adult daycare center.

For 2024, you can set aside up to $5,000 if your tax-filing status is single, head of household or married filing jointly. If you’re married and file separately, the contribution limit is $2,500.

The child and dependent care tax credit can also help offset care expenses, but you can claim it only for expenses that aren’t reimbursed by your dependent care FSA. The maximum credit that you can claim depends on your adjusted gross income. If your AGI is more than $43,000, you can claim up to 20% of care expenses. The percentage increases as AGI decreases, topping out at 35% for those with AGI of up to $15,000.

Dependent care FSA: Use it or lose it

As is the case with flexible spending accounts for health care, you must use up funds in your dependent care FSA by the end of the year — or mid-March if your employer offers a grace period — to avoid forfeiting any unused balance.

Save receipts and invoices from your care providers to submit to your employer so you’ll be reimbursed for those costs. You can usually file a claim on your benefits website or with your human resources department’s benefits manager. Some employers will give you 90 days after the plan year ends to submit claims for reimbursement.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Ella Vincent is a personal finance writer who has written about credit, retirement, and employment issues. She has previously written for Motley Fool and Yahoo Finance. She enjoys going to concerts in her native Chicago and watching basketball.