As we move into summer, the burden of paying for childcare becomes even heavier for parents now that most kids are out of school for the year. But with a dependent care flexible spending account (FSAs) – separate, but not dissimilar, from a healthcare FSA – paying for childcare can be done in a more tax-efficient manner.
Because of the American Rescue Plan, the contribution limits for a dependent care FSA have changed for 2021. Let’s take a look at what a dependent care FSA is, what changed for 2021, the action you need to take, and some considerations to think about.
What is a Dependent Care FSA?
If you have dependents and you pay for childcare — nanny, daycare, etc. – you can have money taken from your paycheck and put into a dependent care FSA account. A dependent care FSA is a pre-tax benefit account, meaning the funds are taken out of your paycheck and deposited into your account before taxes are deducted. Here are some examples of dependent care FSA eligible expenses:
- Before and after school care
- Babysitting and nanny expenses
- Daycare or preschool
- Summer day camp
A dependent care FSA can also cover care for your spouse or relative who is not capable of self-care and lives in your home.
What Did the American Rescue Plan Change for 2021?
Passed in March by President Joe Biden, the American Rescue Plan brought a series of legislative changes for 2021. Included in the changes was the one-time change to the contribution limit for dependent care FSAs – that’s to say the contribution limit is not permanently changed but changed for 2021 only. The new contribution limit is $10,500 for 2021 (for single taxpayers and married filing jointly), a limit that was previously set at $5,000 per year. The contribution limit for taxpayers that are married filing separately was increased to $5,250 in 2021, up from $2,500.
What do I need to do?
This contribution limit is obviously a big change, but it is by no means automatic. There’s action required on your end. Though the legislation was passed in March, it has taken employers time to catch up with it and adopt the change, while some haven’t adopted it yet. If you’re hoping to increase your contribution to your dependent care FSA, here are some steps you can take:
- Check with your employer/HR department to see if the dependent care FSA change has been adopted.
- Acquire a form from your HR department or dependent care FSA provider for making changes to your contributions
- Fill out and return the form (or call, sign electronically, etc. Each employer might handle this differently!)
What should I keep in mind?
If you were to enact the contribution change today, you would still have more than half of a year of contributions to make up for. With that in mind, you should analyze your cash flow to understand how the increased withdrawal will impact your month-to-month budgeting and saving. At the end of the day, this is still a very tax-advantaged way to pay for your childcare. Should you have any questions about dependent care FSAs specifically, or how one might fit into your larger financial plan, don’t hesitate to reach out to us.