For many families, the cost of providing child or dependent care is a significant and necessary expense. In fact, millions of Americans who are responsible for the care of a child, an older adult or a disabled family member would be unable to work outside the home without some form of support.
The Dependent Care Financial Savings Account, which is a key element of the American societal safety net, provides this much-needed support. The account gives working-class families help in caring for a child or adult who can't care for herself.
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Dependent Care FSA Requirements
To qualify for a Dependent Care Flexible Spending Account, an employee must care for a child or adult who is not capable of caring for herself. In addition, the employee must claim the dependent on her tax return, and the dependent must live in the taxpayer's home for eight hours a day or more.
The IRS places several restrictions on the establishment and use of the Dependent Care FSA:
- The Dependent Care FSA is available to workers whose employer offers the FSA.
- As of the 2021 tax year, an employee can deposit as much as $10,500 per year in the FSA. For the 2022 tax year, the maximum will be $5,000.
- In the event of a divorce, a child's custodial parent may establish an FSA.
- Any cash an employee places in an FSA must be spent on dependent care within a specified time.
- Once an employee deposits funds in the FSA, she can't withdraw the cash.
The Function of a Dependent-Care FSA
If you've established a flexible spending account for dependent care through your workplace, your employer funnels pretax money from your paycheck into that account each pay period. For the 2021 tax year, the maximum an employee could deposit was $10,500, but for 2022, the maximum will return to $5,000. Once you pay a daycare or summer camp bill directly, you apply for reimbursement and get cashback on request.
To receive the reimbursement, the expense must qualify for reimbursement from the FSA. Also, you must complete the claim form your employer will provide you and attach proof of payment or a receipt to the form. The receipt for service must provide specific information:
- Name of the patient or child who received the service
- Name of the provider who delivered the service
- The date when the service was provided
- A detailed description of the service the provider delivered
- The amount the FSA account owner paid for the service
Primary Benefit of Dependent Care FSA
The owner of a Dependent Care FSA benefits from the account in one primary way: the account's owner sets aside pretax dollars to pay for dependent care through the workplace. Consequently, the account reduces the pretax dollars that are subject to income taxes. For instance, an employee in the 22 percent federal tax bracket will save $220 in federal taxes for every $1,000 the employee pays for dependent care via a Dependent Care FSA.
IRS Restrictions on the Dependent Care FSA
The IRS restricts the cash a taxpayer can contribute to a Dependent Care FSA. The American Rescue Plan Act passed in 2021 raised the amount from $5,000 to $10,500 for individual filers and married couples that file jointly for the tax year 2021. The limit for a couple that files separate returns is $5,250.
For the tax year 2022, the FSA limit returns to $5,000 for a single filer and a couple that files jointly. The limit for a married couple that files separate returns is $2,500.
Expenses that can be reimbursed with FSA cash must relate to one of the following dependents: