Do I need a Dependent Care Spending Account?

• Do you have children under age 13 who are in daycare/after-school programs while you work?
• Do you pay for the care of disabled or elderly dependents so that you can work?

If you answered yes to either of the above questions, then the Dependent Care Spending Account may be right for you.

How does it work?
The Dependent Care Spending Account reimburses you for work-related daycare expenses for eligible children and adults. Through regular payroll deductions, you set aside part of your income to pay for these expenses on a tax-free basis.

To qualify, your dependent(s) must be:

• A child under the age of 13, or
• A child, spouse, or other person considered your dependent for tax purposes who is physically or mentally incapable of self care, regardless of age.

Getting started is easy!
First, estimate how much you will spend on dependent care in the calendar year. Based on the amount you elect, contributions will be taken out of your paycheck each pay period throughout the plan year.

Then you file a claim for the expense and are reimbursed from your account. You are reimbursed up to your account balance at the time of reimbursement. If there is an outstanding balance, this will automatically be pended until additional payroll deductions are accrued.

It's important to remember, however, that expenses eligible for reimbursement through the Dependent Care Spending Account are the same expenses that are eligible for tax credit on your federal income tax return. You will have to decide which method is better for you based on your income and personal tax status.

Generally speaking, the Dependent Care Spending Account provides more tax savings than the federal tax credit. Beginning in 2003, most families with an annual gross income above $43,000 will save MORE tax dollars by using the Dependent Care Spending Account.

The dependent care tax credit's higher limit on qualifying expenses will change how the tax credit and Dependent Care Spending Account interrelate. Starting in 2003, an employee with two children and $6,000 in dependent care expenses will be able to use both the Dependent Care Credit and Dependent Care FSA.

The employee will first optimize participation in the Dependent Care FSA at $5,000 and then take the Dependent Care Credit on the remaining $1,000 ($6,000 reduced by FSA deferrals of $5,000) of eligible expenses. Under the covered $4,800 credit limit in effect before 2003, this would not be possible.

For a complete list of dependent care expenses that qualify for reimbursement, click here.