Uses of Dependent Care FSA

Question

When we had our first child earlier this year, we signed up for the company Dependent Care FSA, anticipating substantial daycare expenses later this year.

Now a few months later, my wife is considering being a stay-at-home mom, and not spending money on day care.

These FSA accounts are "use-it-or-lose-it", so the money needs to be spent somewhere.

Do you have experience with good eligible, non-daycare related expenses?

Answer 1

The best resource for this is IRS Publication 503, which covers all of your eligible expenses.

The short answer: you can claim 100% of what you've paid so far for daycare, but once your wife stops working, you cannot claim anything at all (whether or not it would normally qualify). If you've paid over $5000 (the limit for the year), you're fine to claim that amount. (When I had one child in daycare, I would spend about that amount in three months, but I may be in a higher cost area than you.)

A few details:

1. The expenses incurred must be so you and your spouse can work or look for work. If your wife stops working, then you're limited in two ways:

   a. You can only claim expenses incurred up to the point where she stopped working

   b. You can only claim expenses up to the total of her earned income for the year

   So if she worked for 3 months and made $15,000, and you incurred childcare expenses of $3500 during that time, then you're eligible to claim all $3500 in expenses, but no more later in the year. You don't have to pro-rate it for the portion of the year (i.e., you're not limited to 25% of the maximum or anything like that), but you'd be restricted to only those expenses incurred during the first part of the year.

2. Dependent Care FSA requires you to make the contribution before you withdraw it (as opposed to Healthcare FSA where you can withdraw 100% on Jan 1). However, you can claim for the entire amount at any time, and you'll typically be paid over the year with each paycheck the amount withheld, and it's fine for you to be withdrawing for the period you claimed (Jan-Mar).

3. Other than daycare, you also can claim a few things:

   • After-school care once they're in grade school
   • Summer camps
   • Wages for household help if they also help care for children part of the time

The full list is in publication 503. You cannot claim tuition for schools (once they're eligible for public school, at 5), and you cannot claim babysitting if it is not regular daycare-type babysitting.