Why Working Parents Should Use a Dependent Care FSA

Daycare is an expensive need for working parents. I don't have a first-hand understanding (no kids yet), but I do appreciate the strain this can put on my fellow firefighter's finances.

If you could save $1,500 (more/less) a year on daycare would you be interested? If you're having a hard time, I'll answer for you...YES!!!

And you can save that kind of money by paying smartly through utilizing a Flexible Spending Account.

Dependent Care Flexible Spending Account

The dependent care Flexible Spending Account is designed for working parents who have childcare costs due to their jobs. You can contribute up to $5,000 per year on a PRE-TAX basis. Meaning, your FSA contributions will reduce your taxable income. Your account can be used for daycare or summer camps for children under the age of 13 or even care for an elderly parent that qualifies as your dependent.

The caveat is the contributions fall under a use-it-or-lose-it rule. So you must plan accordingly.

If you have kids and pay for daycare, you have probably cussed the cost of this service before. It can be frustrating, but don't let easy tax savings slip through the cracks.

Let's take a look at an example.

Example Family

Corey and Topanga have a 3-year-old daughter. Corey works full-time as a firefighter and cuts grass part-time on his off days. Topanga works Monday through Friday as an office manager.

Their daughter, Riley, goes to daycare about 48 weeks a year. They pay weekly at a rate of $125 per week. If Riley goes 48 weeks out of the year, Corey and Topanga have to pay $6,000 for the year.

Since their annual cost is more than the max contribution, they should contribute $5,000 to their dependent care FSA. If they are in the 22% tax bracket, they will end up saving close to $1,500 in FICA and federal income tax.

This reduces their all-in cost for $6,000 worth of daycare down to $4,518. That's enough to pay for a vacation one of those weeks they were all together!

I'll reiterate: Don't let easy tax savings slip through the cracks!

Take Advantage of It

This account is designed to help working parents like yourself, please don't miss out on it. Now is the time of year that open enrollment typically comes around. Make time to open up the PDF that human resources sent you and go through it thoughtfully. Do the math to see how much you should set aside and make the election to do so!