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2024 Tax Season: Dependent Care Costs

2024 Tax Season: Dependent Care Costs

March 18, 2024

2024 Tax Season: Tax Strategies

Like many of you, my wife and I are gathering our documents to prepare for our 2023 taxes. Oh, the joys of tax season. As we all go through this process, now is a good time to evaluate any modifications for tax year 2024. For individuals and families who are coping with increasing costs, reducing your tax liability is one way to free up cash flow. I’ll be focusing on one tax strategy, a Dependent Care Flexible Spending Account (FSA).


Some of you are familiar with a Flexible Spending Account (FSA) for medical related expenses. A Dependent Care FSA is strictly for qualified child and dependent care expenses. Like a medical FSA there is a “use it or lose it” policy.

The other day I was in a meeting with a client who is looking for daycare for their first child. Having two young children of my own, I can remember the pains of trying to find an affordable option but more importantly a good fit. The cost of daycare in Northern Virginia is quite expensive. One way to help with this reality is using a Dependent Care FSA.

How does a Dependent Care FSA help with taxes?

Currently, the maximum contribution amount is $5000 for both single and married filling jointly taxpayers.  Unfortunately, the $5000 amount is not adjusted for inflation on a year-to-year basis. If you live in Fairfax County, daycare costs could easily reduce this $5000 balance in just a few months.

Since contributions are made with pretax dollars your taxable income is reduced. For example, if you were in the 24% federal tax bracket you would reduce your taxes by $1200, assuming the maximum $5000 contribution. For some, that is an amount of two car payments, nothing to sneeze at.

What can you use a Dependent Care FSA for?

Earlier I mentioned daycare for young children. Other more common examples are before and after-school care, summer day camps, in-home nanny services, or adult daycare.

At one point, my wife and I were using a Tae Kwon-Do school for before care. We used the Dependent Care FSA to help pay for this expense.

Some of you are familiar with SACC, Fairfax County School Age Child Care. They provide before and after-school care at Fairfax County Public Schools. A Dependent Care FSA can be used here.

What does not qualify as a qualified expense for Dependent Care FSA for?

The IRS has established rules to clarify what is considered a qualified expense. You can imagine some taxpayers have gotten creative with this.

Tutoring, summer school, music lessons, private school tuition are a few examples of ineligible expenses.

How do you access a Dependent Care FSA?

Your employer provides the ability for you to contribute to a Dependent Care FSA. Open-enrollment season is when an employee would opt-in unless a qualifying life event occurred e.g. birth of a child.

Conclusion

When it comes to reducing your tax liability you want to be able to take advantage of as many options as possible. Considering a Dependent Care FSA is one way to do this.

If you have any specific questions, please do not hesitate to reach out.

 

 

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.