Dependent Care Reimbursement Account
A Dependent Care Reimbursement Account can be used to reimburse for eligible daycare expenses for children age 12 and under or for adult daycare expenses for a disabled spouse or IRS tax dependent. The maximum annual deduction is $5000 (or $2500 if married and filing separately).
The primary purpose of Dependent Care expenses must be for "custodial care" and allow you and your spouse, if married, to be gainfully employed (full or part time), looking for work or a full time student. Just because an expense is incurred during working hours does not necessarily make it an eligible dependent care expense. Please read below a list of eligible and ineligible dependent care expenses. For additional information on eligible dependent care expenses, see § 129 of the Internal Revenue Code.
Reminder: Income tax credits are also available for childcare expenses. You may want to consult a financial adviser to determine whether a Flexible Spending Account or tax credit is a better option.
Ineligible Dependent Care Expenses
- Payments to a spouse or parent of a qualified individual
- Educational Fees/Tuition
- Overnight camps
- Food, clothing
- Care not related to work
- Transportation expenses provided by parents
Eligible Dependent Care Expenses
- Before and after school care for children under the age of 13
- Care provided in your home (provider cannot be an IRS tax dependent or a dependent under the age of 19)
- Home or daycare for eligible disabled IRS tax dependents (must spend at least eight hours per day in your home)
- Licensed day-care providers
- Registration Fees (Provided the qualified dependent actually receives the care)
- Summer day camps for children under the age of 13 (even if overall theme of camp is entertainment or educational in nature)
Dependent Care Account Questions
How do I determine Dependent Status?
Child must be younger than the taxpayer and the child must be unmarried
If parents are no longer together who can claim the child?
Typically only the Custodial parent can treat a child as a dependent in the event of divorce, legal separation, or have lived apart at all times during the last 6 months.
Custodial Parent: If parents do not file a joint federal income tax return, the child can only be claimed by one parent; the Custodial Parent. How to determine the Custodial Parent:*
- Whom child resides with for more than half of the year
- The custodial parent is the one with whom the child resided with for the greater number of nights during the calendar year.
- If the child resides with both parents for the same amount of time, the parent with the highest adjusted gross income may claim the child as a dependent.
*Exception: If it is stated in a divorce decree that the non-custodial parent can to claim the child as a dependent, then the decree must be upheld, and the above does not apply. They will need to attach a signed declaration from the Custodial Parent when filing their taxes.
Non-Custodial Parent: A non-custodial parent may claim a child as a qualifying child if;
- the parents of the child provide more than half the child support for the calendar year,
- the child is in the custody of one or both parents for half the calendar year,
- the parents are divorced, legally separated, or have lived apart at all times for the last 6 months,
- the custodial parent does not claim the child as a dependent.
When submitting expenses for childcare, are receipts from the Daycare provider required?
Yes, you must complete the Reimbursement Request Form and attach a receipt of payment indicating the dates of service. (Please see Instructions and Tips for Filing Claim Forms)
Are childcare expenses that I pay to a family member reimbursable under my Flexible Spending Account?
Yes, as long as the family member is not a dependent of the member. The definition of a dependent is either a minor child or an adult living in the member’s household receiving 50% of support from the member.
If a 5-year-old child is in a private school, is the entire expense reimbursable under my Flexible Spending Account?
The IRS has made the determination that a 5-year-old child in school is considered to be in a kindergarten level class. The cost of the services for instructional education is not reimbursable. If a 5-year-old child or younger does not receive instructional education for a full day, but instead receives daycare services for a portion of that day, the provider must itemize a receipt with the hours of education and the hours of daycare services. The cost for the hours of daycare is reimbursable under your Flexible Spending Account. The cost for the hours of educational instruction is not reimbursable.
What happens if I don't claim reimbursement for all the money that has been deducted from my paycheck?
If you have set aside dollars through salary reduction, and you do not use those dollars by the end of the plan year, you will lose those dollars. The IRS requires that all funds that have been deducted from your paychecks and placed in the Dependent Care Account must be used during the plan year. It is important to deduct from your salary only the amount that you are sure you will incur as expenses during the plan year. Therefore, it is important to deduct from your salary only the amount that you are sure you will incur as expenses during the plan year.
Can I use the money in my Dependent Care Account to help pay for medical expenses not covered by my insurance?
Contributions allocated to one benefit account can only be used to pay a claim from that benefit program. For example, your contributions to your Dependent Care Account cannot be used to pay a medical care expense claim.
Can I change my Dependent Care Flexible Spending Account deduction amounts during the plan year?
Changes to the amounts deducted from your salary and deposited into your Dependent Care Account can be made if any of the following qualifying events occur:
- A change in the cost of dependent care.
- Employment status
- Any employment status change for the employee, spouse or dependent
- Termination or commencement of employment, strike or lockout
- Return from unpaid leave of absence
- Change in worksite
- Dependent eligibility
- A change in dependent eligibility that causes the dependent to satisfy or cease to satisfy requirement due to: age, marriage, or any similar circumstances
- A change in family status caused by:
- Change in number of dependents
- Change in legal marital status
- An unpaid leave of absence by you or your spouse
The dual purpose IRS Form 2441 ("Child and Dependent Care Expenses") and its accompanying instructions for the 2012 tax year are listed below.
- Taxpayers file it with Form 1040 to determine the amount of their dependent care tax credit (DCTC).
- They also use it to establish that the amounts reported in Box 10 of Form W-2 (the value of employer-provided dependent care (DCAP) benefits) are not taxable.