Dependent Care FSA
An employer-sponsored account for pre-tax dollars used to pay qualifying childcare and elder care expenses.
What is Dependent Care FSA?
A dependent care flexible spending account (DCFSA) allows employees to contribute up to $5,000 per household per year ($2,500 if married filing separately) in pre-tax dollars to pay for qualifying dependent care expenses such as daycare, preschool, after-school programs, summer day camps, and elder care. Contributions reduce federal taxable income immediately, generating tax savings equal to the employee's marginal tax rate plus payroll tax savings. Unlike health savings accounts, DCFSA funds generally do not roll over — unused balances are forfeited at year-end under the use-it-or-lose-it rule, though employers may offer a grace period of up to 2.5 months or a limited carryover.
Example
A couple in the 22% federal tax bracket contributes $5,000 to a dependent care FSA to cover their toddler's daycare costs. Their federal tax liability drops by $1,100 (22% × $5,000), plus payroll tax savings of approximately $382, for total annual savings exceeding $1,480 compared to paying daycare with after-tax dollars.
Source: IRS Publication 503 — Child and Dependent Care Expenses