Flexible Spending Accounts are established as a way to allow people to pay for either healthcare or dependent care expenses with money their employer withholds from their paycheck before taxes. Employers benefit from these plans, because they pay fewer payroll taxes by reducing the employee's take-home pay. If both working spouses are covered by dependent-care FSAs, each can contribute to such a plan, with some limitations.
How It Works
The dependent care FSA is a benefit that your employer may choose to offer as part of its benefits package. These types of benefits, which allow you to take a tax-free benefit in lieu of money in your paycheck, are called cafeteria plans. Your participating employer may give you the option to enroll in a dependent care FSA during a time of open enrollment. It will then withhold the amount you agree on from your paycheck each week before it calculates your income and Social Security taxes. You then submit your receipts for qualifying dependent care to the plan and receive reimbursement through the money you have contributed.
Maximum Total Deferral
The maximum total deferral for a family to use for dependent care expenses is $5,000 per year. When only one spouse is eligible for an FSA for dependent care, this is not a problem, as the employer will generally not allow you to defer more than $5,000 per year into the account. If your spouse is also eligible for a dependent care FSA, he could also elect to have $5,000 withheld, meaning that you will contribute too much to your account for the year.
Exceeding the Deferral
If you exceed the yearly allowable deferral because your spouse works, you will need to claim the additional amount that you had deferred as income. This is so you can pay taxes on the benefit the you should have never received. The excess contribution must also be added in on Form 2441 as income if you take advantage of the Dependent Care Tax Credit.
Dependent Care Credit
While it is generally to your advantage to use an FSA to pay for childcare expenses instead of using the Dependent Care Credit, you may be able to use both in certain cases. With one child, you can claim a partial tax credit based on your income for up to $3,000 in childcare expenses. With two or more children, the amount rises to $6,000. If you contribute and are reimbursed for less than these amounts with an FSA, you may apply the excess expenses toward your allowable Dependent Care Credit. If you have $5,000 withheld from your pay for reimbursement for daycare expenses for your two children, and the total expenses for daycare so that you can work are $9,000, you have $4,000 in excess expenses. You can claim up to $6,000 per year toward the credit, but this amount is reduced by amounts that you contribute to an FSA. In this case, you still have $1,000 available toward the credit.