Dependent Care Account?

[sherry7]

I'm not sure I even have the name right...is a Dependent Care Account the thing where you put pre-tax money aside to pay for daycare expenses?

I know that my employer offers this, and open enrollment starts in about a month. Can you tell me more about how a Dependent Care Account works? Thanks.

 

[mistysue]

Just something to be careful about- I've noticed a significant drop in the amount of child care that I could deduct in recent years. When DD was 3 I remember almost all of it was a deduction, but last time I did my taxes it was only letting me take a credit, which was much less than what the deduction would have given me.
So I would be careful about putting aside "tax free" money. If you set aside $5K pre-taxes and in the end you can only deduct $2K, you may find you end up owing some money you didn't count on.

 

[tlbwriter]

Yes, it's putting back money pre-tax to use for child care expenses. Some things to consider:

- The provider must claim the income on their taxes. You will have to turn in a receipt with the provider's SSN or tax ID number. So if you were going to, for example, pay Grandma under the table to babysit, this will not work for you.

- You cannot withdraw the money until it's in your account. For example, if you get paid weekly, and $100 goes into your account every week, but you have a $400 daycare bill that you paid on the 1st of the month, you won't immediately be reimbursed the entire $400. You'll get $100 every week. (Unless that's just my employer?)

- Any money not spent is forfeited.

 

[Kitzka]

I have an account with my employeer and have since DD was 2 (she is 12 now). Money is put into the account pretax and for my it is up to $5000. the money comes out of my paycheck and i never "notice" it. i also recieved a visa card that i can use to pay for my childcare expenses.

sometimes of childcare are not reimburseable through the account. I am 100% sure i am remembering correctly, but some of the not allowed reimburseable types are sleep away camp, baby sitting so you can go out and childcare in your home done by a relative.

you can use it for after and before school care, day camp. i recieve a via to use at the facilities. since DD goes to aftercare at school and a day camp that don't take credit cards, i have never used it. I have to pay for the services upfront and get reimbursed for it once the service has been rendered. SO, i pay for summer camp in april but i can't get reimbursed for this until camp starts in june. with afterschool care i owe the money for the next month the 15th of the preceeding month. i can't get reimbursed for that until the month starts.

One other things to be aware of is that unlike the healthcare accounts you have to have money from your paycheck to cover it. So in Jan with my healthcare account i can access all of that money but i can't access more than what has been deposited in the childcare one.

Usually, i choose not to get reimbursed until nov or dec. this way i can use that money as holiday spending or as vacation funds.

the dependant care accounts are usually only good through the child being 13. so this is my last year with the account as i can get reimbursed for expenses that i incur prior to her birthday which is luckily Aug so i can get one more summer of summer camp reimbursed.

lara

 

[neatokimmo]

The only reason I use it is because my employer contributes 15% of the amount to the account.

If you get to deduct it from your taxes or pay for it pretax in the account - isn't that essentially the same thing? I'd love to hear from an accountant about it. They have been cutting perks from my job for years, I'm expecting the 15% to go away any day now.

OP - I use mine to pay for DD's preschool and daycare. She goes to a church down the road.

I think prepaying then getting your money back later is a paid. But I do it for the 15% (I'm so cheap).

 

[Irin997]

Just something to be careful about- I've noticed a significant drop in the amount of child care that I could deduct in recent years. When DD was 3 I remember almost all of it was a deduction, but last time I did my taxes it was only letting me take a credit, which was much less than what the deduction would have given me.
So I would be careful about putting aside "tax free" money. If you set aside $5K pre-taxes and in the end you can only deduct $2K, you may find you end up owing some money you didn't count on.

I think you are misunderstanding what a dependent care spending account is. It has nothing to do with the dependent care tax credit. The dependent care spending account lowers your taxable income by up to $5,000 per year. If you do not use the spending account and take the tax credit instead, you can only claim up to I Think $3000 in eligible expenses that you paid with taxed money, not tax free.

Think of it like this. Say you make $40,000 per year and set aside $5,000 per year in a dependent care spending account. By the time tax time rolls around, your taxable income goes from $40,000 to $35,000 instead, possibly putting you into a lower tax bracket. Same goes for all medical, flex spending, and 401k contributions.

IF you paid OOP for dependent care and did not use a spending account, your taxable income would still be $40,000 but you could claim the $3,000 tax credit. This would cause you to pay more in taxes.

Make sense?

Anyway, I've had a dependent care spending account for about 3 years now and I love it. The only PITA thing is that the money has to be in the account to submit claims, unlike a flex spending account. BUT it's really quick and easy to get reimbursed.

 

[crisi]

I think you are misunderstanding what a dependent care spending account is. It has nothing to do with the dependent care tax credit. The dependent care spending account lowers your taxable income by up to $5,000 per year. If you do not use the spending account and take the tax credit instead, you can only claim up to I Think $3000 in eligible expenses that you paid with taxed money, not tax free.

Think of it like this. Say you make $40,000 per year and set aside $5,000 per year in a dependent care spending account. By the time tax time rolls around, your taxable income goes from $40,000 to $35,000 instead, possibly putting you into a lower tax bracket. Same goes for all medical, flex spending, and 401k contributions.

IF you paid OOP for dependent care and did not use a spending account, your taxable income would still be $40,000 but you could claim the $3,000 tax credit. This would cause you to pay more in taxes.

Make sense?

Anyway, I've had a dependent care spending account for about 3 years now and I love it. The only PITA thing is that the money has to be in the account to submit claims, unlike a flex spending account. BUT it's really quick and easy to get reimbursed.

Its been a while, but I think you get one or the other, not both. We haven't had daycare bills though in three years (!!!!!)

 

[neatokimmo]

I think you are misunderstanding what a dependent care spending account is. It has nothing to do with the dependent care tax credit. The dependent care spending account lowers your taxable income by up to $5,000 per year. If you do not use the spending account and take the tax credit instead, you can only claim up to I Think $3000 in eligible expenses that you paid with taxed money, not tax free.

Think of it like this. Say you make $40,000 per year and set aside $5,000 per year in a dependent care spending account. By the time tax time rolls around, your taxable income goes from $40,000 to $35,000 instead, possibly putting you into a lower tax bracket. Same goes for all medical, flex spending, and 401k contributions.

IF you paid OOP for dependent care and did not use a spending account, your taxable income would still be $40,000 but you could claim the $3,000 tax credit. This would cause you to pay more in taxes.

Make sense?

Anyway, I've had a dependent care spending account for about 3 years now and I love it. The only PITA thing is that the money has to be in the account to submit claims, unlike a flex spending account. BUT it's really quick and easy to get reimbursed.

I'm not the OP but let me ask a question. If my company ditches the 15% subsidy and i keep my daycare expenses to 3K or less, I don't have any benefit to using the spending account?

 

[mistysue]

Hold on,
Lets say I spend $10,000 on child care this year. Are you saying that if I put it into the dependent care account, I am allowed to deduct $5000 of it EVEN IF I was only allowed to deduct $3000 of it for child care if I didn't have the account?

I spend aprox $10-15,000/year on child care. A few years ago most of it was deductible. My point was that suddenly last year I couldn't deduct any of it. Something changed about how your max allowed deductions are calculated. (That, or I got totally screwed by my tax lady)

Does a dependent care account allow you to not pay tax on parts of your income you otherwise would pay tax on in the end?!? If so, this is so unfair for those of us whose employers don't offer these spending accounts.

I think you are misunderstanding what a dependent care spending account is. It has nothing to do with the dependent care tax credit. The dependent care spending account lowers your taxable income by up to $5,000 per year. If you do not use the spending account and take the tax credit instead, you can only claim up to I Think $3000 in eligible expenses that you paid with taxed money, not tax free.

Think of it like this. Say you make $40,000 per year and set aside $5,000 per year in a dependent care spending account. By the time tax time rolls around, your taxable income goes from $40,000 to $35,000 instead, possibly putting you into a lower tax bracket. Same goes for all medical, flex spending, and 401k contributions.

IF you paid OOP for dependent care and did not use a spending account, your taxable income would still be $40,000 but you could claim the $3,000 tax credit. This would cause you to pay more in taxes.

Make sense?

Anyway, I've had a dependent care spending account for about 3 years now and I love it. The only PITA thing is that the money has to be in the account to submit claims, unlike a flex spending account. BUT it's really quick and easy to get reimbursed.

 

[bored]

Hold on,
Lets say I spend $10,000 on child care this year. Are you saying that if I put it into the dependent care account, I am allowed to deduct $5000 of it EVEN IF I was only allowed to deduct $3000 of it for child care if I didn't have the account?

I spend aprox $10-15,000/year on child care. A few years ago most of it was deductible. My point was that suddenly last year I couldn't deduct any of it. Something changed about how your max allowed deductions are calculated. (That, or I got totally screwed by my tax lady)

Does a dependent care account allow you to not pay tax on parts of your income you otherwise would pay tax on in the end?!? If so, this is so unfair for those of us whose employers don't offer these spending accounts.

You don't deduct the $5000.00. Let's say you get paid once a month. You would have $416.67 deducted from your check pre-tax. That's pre income taxes as well as medicare & SS. You don't have to pay income tax or social security on those wages (saves 7.65% + your income tax rate).

The catch is this $5000.00 can't be used in calculating you dependent care deduction on your tax return. With that being said you dep. care deduction on your return is usually not 100% what you pay so the dependent care account is usually better.

As far as being fair it's no different than on employer paying 100% health care while the company next door paying nothing. It's a benefit that a company can choose to offer or not because it costs the company money to have the plan administered.

 

[Tink415]

There's nothing fair about what kind of benefits employers offer! Some offer none, others are very generous.

Yes, Dependent Care Spending Accounts reduce your taxable income. $5000 is the max. If you spend $10,000 for daycare, $5000 can come from the DCSA, and whether or not you can deduct any of the extra $5000 depends on your (joint if filing jointly) income. Also, if something changes, and you don't use the $5000 in the DCSA, guess what, your income is just gone and there's no getting it back. And as others have said, you have to pay into the account before getting back. I pay for summer camp (about $3000) in March and can't be reimbursed from the account until the date(s) of service have passed and there is enough money in the account; meanwhile, some of that money comes out of my check each pay period.

I've been using a DCSA for many many years and sometimes wonder if DCSA is worth the time I spend on it for the tax savings

 

[mistysue]

wow, now I feel like I've been being scammed by the gov. by just getting my deductions for the last 7 years.

 

[Irin997]

I pay for summer camp (about $3000) in March and can't be reimbursed from the account until the date(s) of service have passed and there is enough money in the account; meanwhile, some of that money comes out of my check each pay period.

I've been using a DCSA for many many years and sometimes wonder if DCSA is worth the time I spend on it for the tax savings

One of the things I have done is opened a separate checking account for my daycare expenses. I pay all child care costs from it using my bank card and then all reimbursements get deposited into it as well. So it is basically a "wash" account. When I wasn't doing this I always felt like I had to "come up" with the money to pay for daycare and couldn't wait for my reimbursement to come. Now I have the money a head of time, especially when it comes to pre-paying for DD's summer day camp.

 

[NotUrsula]

In some cases you can shelter the full $5K in a Dependent Care Flexible Spending Account and also still take the maximum $3K childcare deduction; it just depends on how your income in structured and what you can itemize. For several years now we have been able to do both, because our combined dependent care costs for the year have been about $14K; it is a really significant portion of our joint income.

This year our oldest aged out, so it won't be as good for us now that we cannot count summer day camp fees for him.

Also, note that the $5K maximum pre-tax shelter is per household, not per person. That is the maximum that can be sheltered for childcare per family.

I don't spend much time keeping up with mine; I have the forms filled out in advance and once per quarter I fax in a daycare ledger statement for the reimbursement.

 

[CowboyCO]

Just something to be careful about- I've noticed a significant drop in the amount of child care that I could deduct in recent years. When DD was 3 I remember almost all of it was a deduction, but last time I did my taxes it was only letting me take a credit, which was much less than what the deduction would have given me.
So I would be careful about putting aside "tax free" money. If you set aside $5K pre-taxes and in the end you can only deduct $2K, you may find you end up owing some money you didn't count on.

Yes -- please be careful. I lost over $1,000 in one of these accounts (Flex) because it was set up wrong. There are two different kinds - one for child and dependent care and the other for medical expenses. Make sure yours is set up for the proper use.

As a result of "Health Care Reform", they dramatically cut back on how much you could put aside and also how you could use it. OTC medications, such as my allergy medicine, is no-longer eligible. It's a tax increase on those of us who have used Flex accounts to use pre-tax income to pay for child care and medical expenses. That being said, as long as you are careful about how much is withheld and the expiration dates on the accounts, there is still a benefit in doing it.

JUST MAKE SURE YOU KNOW WHEN THE FISCAL YEAR FOR THE PLAN IS. DON'T ASSUME THAT IT IS THE SAME AS YOUR HEALTH INSURANCE OR THE CALENDAR YEAR!!! Sorry for the caps, but if you don't use it within those time periods and properly claim the expenses, the insurance company gets to steal your money. (I wish I had a lobbyist for DIWKS...) (That's Dual Income with Kids)

 

[bored]

Yes -- please be careful. I lost over $1,000 in one of these accounts (Flex) because it was set up wrong. There are two different kinds - one for child and dependent care and the other for medical expenses. Make sure yours is set up for the proper use.

As a result of "Health Care Reform", they dramatically cut back on how much you could put aside and also how you could use it. OTC medications, such as my allergy medicine, is no-longer eligible. It's a tax increase on those of us who have used Flex accounts to use pre-tax income to pay for child care and medical expenses. That being said, as long as you are careful about how much is withheld and the expiration dates on the accounts, there is still a benefit in doing it.

JUST MAKE SURE YOU KNOW WHEN THE FISCAL YEAR FOR THE PLAN IS. DON'T ASSUME THAT IT IS THE SAME AS YOUR HEALTH INSURANCE OR THE CALENDAR YEAR!!! Sorry for the caps, but if you don't use it within those time periods and properly claim the expenses, the insurance company gets to steal your money. (I wish I had a lobbyist for DIWKS...) (That's Dual Income with Kids)

Actually your company gets to keep your money! But with that being said if someone spends all their flexible spending money the first week of the year then quits the company is stuck paying for it.

 

[sdjen]

Yes -- please be careful. I lost over $1,000 in one of these accounts (Flex) because it was set up wrong. There are two different kinds - one for child and dependent care and the other for medical expenses. Make sure yours is set up for the proper use.

As a result of "Health Care Reform", they dramatically cut back on how much you could put aside and also how you could use it. OTC medications, such as my allergy medicine, is no-longer eligible. It's a tax increase on those of us who have used Flex accounts to use pre-tax income to pay for child care and medical expenses. That being said, as long as you are careful about how much is withheld and the expiration dates on the accounts, there is still a benefit in doing it.

JUST MAKE SURE YOU KNOW WHEN THE FISCAL YEAR FOR THE PLAN IS. DON'T ASSUME THAT IT IS THE SAME AS YOUR HEALTH INSURANCE OR THE CALENDAR YEAR!!! Sorry for the caps, but if you don't use it within those time periods and properly claim the expenses, the insurance company gets to steal your money. (I wish I had a lobbyist for DIWKS...) (That's Dual Income with Kids)

This is good advice but i have to add a couple of things. The amount you can put into either account - Medical reimbursement and Dependent care - they are two TOTALLY separate plans - will only change for Medical Reimbursment accounts not for Dependent Care. ANd, unless the government changes the rules again (probably pretty likely that change will not happen until i believe 2013 - not right now.

The only change so far for 2011 is to the over the counter drugs being eligible. However, there are still several types of drugs - including allergy meds - that will continue to be eligible for reimbursement but you will have to have a prescription from your doctor first.

HOpe this helps - i happen to work in the insurance industry and have to work with this every day.

 

[tlbwriter]

OTC medications, such as my allergy medicine, is no-longer eligible.

I read that they are still eligible, but you must have something in writing from your doctor.

 

[NotUrsula]

As a result of "Health Care Reform", they dramatically cut back on how much you could put aside and also how you could use it. OTC medications, such as my allergy medicine, is no-longer eligible. It's a tax increase on those of us who have used Flex accounts to use pre-tax income to pay for child care and medical expenses. That being said, as long as you are careful about how much is withheld and the expiration dates on the accounts, there is still a benefit in doing it.

True enough, but what people tend to not mention is that while Healthcare FSA's have been around since 1978, OTC meds have only been eligible for FSA reimbursement since 2003; you couldn't count them before that, either. Essentially, we are just going to be rolling back to the original FSA reimbursement rules.