How to manage FSA Dependent Care

Question

What is a good strategy to manage FSA Dependent Care accounts. Since the money is "use it or lose it" I want to make sure that I use all of the money I put into that account.

The max contribution is $5,000/yr, I am paid biweekly so that is 26 paychecks per year. $5000/26 = $192.30, so each paycheck I should contribute about $192.

Let's say I have $1,000 of monthly daycare expenses, what do I do if at the end of the year I have like $500 in the account? Should I simply write a check for the balance to daycare to pay ahead for the next month, reimburse myself from the account and then pay the rest out of pocket?

Also how much am I really saving by using the dependent care fund? If I contribute the max of $5000/year, that is $5000 less taxed money. If I in 22% tax bracket based on 2019 U.S. Tax Brackets. Am I saving $5000 * 0.22 per year ($1100)? How do state taxes and social security come into play there? is the $5000 * (0.22 + percent of state taxes / social security)?

thanks in advance!

Answer 1

Most Dependent Care FSA plans have a grace period for submitting claims after the last day of the year. When I had one I think it was around 60 days meaning I could submit a claim until the end of February for the previous calendar year. Ask your HR department what the cutoff to submit claims is. Then, as soon as the last paycheck is funded, or in the beginning of Jan, request a check for whatever was left from the previous year that you haven't been reimbursed for yet.

You don't need to pay daycare directly with FSA funds. Just pay as you normally do and request a reimbursement from the FSA account. You'll have plenty of receipts to show for since you'll have paid over $5K in costs long before you can request the reimbursement.

Regarding taxes, you can add up FICA (SS + medicare), Fed and State taxes to see how much you'll save.

Also, if you have 2 or more children, don't forget there is a 20% Dependent Care tax credit that you can also use for up to $6K in expenses. However, the FSA reduces that amount, so you'll be only eligible to claim $1K more. But it's still a $200 tax credit right off of your tax bill.