Taxpayer asks:
I’m a stay at home mom and my husband works full time. My youngest is going to pre-school 2 days per week. My husband’s employer offers a Dependent Care Flex Spending account. Are we allowed to take advantage of that if I’m not working (or looking for work)? I’ve seen this question asked a few times with regards to the Dependent Care Credit, but I’m not sure if that is related to Flex Spending or if it’s something totally separate.
Taxgirl says:
The rules for participating in a Dependent Care Flexible Spending Account (FSA) are pretty much exactly the same as those which govern the Dependent Care Credit. Here’s what you need to know about the Dependent Care FSA.
A Dependent Care FSA is a tax-favored account that is set up through your employer. As with a Healthcare FSA, you authorize your employer to withhold a certain amount of money each pay period. That money is held in an account for your benefit: you use the account to reimburse you for certain dependent care expenses.
The amount that you can put in the account each year is capped at the amount of your earned income or at $5,000, whichever is less, for most households ($2,500 for taxpayers who are married filing separately).
The appeal of the Dependent Care FSA is tax savings: money that is withheld from your paycheck is not subject to federal income tax so long as it’s used for qualifying expenses. So, for example, if you set aside the entire $5,000 and you’re in a 25% tax bracket, you would save $1,250 in tax.
Dependent care expenses may include in-home care, summer day camps, and before/after school care. When figuring expenses, include those used to care for your dependent under age 13; your spouse who wasn’t physically or mentally able to care for himself or herself and lived with you for more than half the year; or another person who is physically or mentally unable to care for himself or herself that you claim as a dependent or would have claimed as your dependent but for certain exceptions (like a parent).
The purpose of the Dependent Care FSA, like the Dependent Care Credit, is to offer a tax break for care for your dependents so that you can work or look for work. If you are single, you must be working or looking for work (unless you are disabled and unable to work) in order to take advantage of the benefit. If you are married, both you and your spouse must work or be looking for work in order to take advantage of the benefit. That means that, as in your case, a family with a stay-at-home parent may not participate in a Dependent Care FSA. If you elect to participate but you do not qualify, the money that you set aside for the FSA will be subject to tax.
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
