If you pay for daycare, preschool, or day camp so you can work, enroll in your employer’s dependent care flexible spending account (FSA) at open enrollment. Money you put in skips federal income and payroll taxes, so in the 22% bracket each dollar of care costs you about 70 cents. Elect only what you’re certain to spend.
The amount you choose comes out of every paycheck next year. Money you don’t use for care by the end of the plan year is forfeited, though some plans add a grace period of up to two and a half months.
Check the child and dependent care credit before you commit. It’s worth 20% to 50% of up to $3,000 in care costs for one child or $6,000 for two or more, and the rate falls as income rises. The same dollars can’t count for both, and every dollar you run through the FSA comes off that cap.
With one child in full-time care, the FSA usually wins. With two or more kids in care, a family in the 12% bracket can save more by skipping the FSA and claiming the credit. Run both numbers before you elect.
Care counts when it lets you work or look for work. Daycare, preschool, before- and after-school programs, and summer day camp can all qualify for children under 13, as can care for a spouse or dependent who lives with you and can’t care for themselves. Overnight camp and tuition for kindergarten and up don’t count. If you’re married, both of you need income from work unless one of you is a full-time student or disabled.
Then size the election. A family paying $12,000 a year for full-time daycare spends more than the FSA’s annual limit, so those parents can elect the maximum and still use every dollar. If your child starts kindergarten in the fall, count only after-school care from then on.
A birth, an adoption, or a move to a new care provider can let you enroll or adjust your election mid-year if your plan allows it. Parents expecting a baby can wait and sign up after the birth.
Before your enrollment window closes, add up next year’s care bills month by month. Elect that total up to the FSA’s limit, unless the credit comes out ahead.
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