Question

DCFSA (Dependent Care FSA) Limit?

Forum|Forum|1 year ago
September 20, 2024
2 replies
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Is there an income limit associated with the DCFSA? I searched through IRS documents and could not find a definitive answer.

O

Opus 17

Employee

You can set aside through your employer a maximum of $5000 per year.

Then, when you prepare your tax return, if your qualifying expenses are less than your set aside, the difference is added back your taxable income as if it was not set aside (but there is no penalty).

The maximum dependent care credit is $3000 for one child and $6000 for two or more children, but the credit and the FSA don't stack. For example, if you pay for care of one child and have a $5000 DCFSA set aside, you won't any additional dependent care tax credit. But if you pay for care for two or more children, and you have $5000 DCFSA but your total costs are more than $6000, the top $1000 would be eligible for the tax credit on top of the tax-free benefit of the FSA.

Generally, the FSA is a better deal (saves more taxes) for anyone who pays for care of one child, and for anyone who pays for care of two children when their income is more than about $45,000.

N

neymancm

Based on the example provided, you're saying anything spent over what was set aside in the FSA can be considered for the tax credit? Even with one child?

O

Opus 17

Employee

@neymancm wrote:

Based on the example provided, you're saying anything spent over what was set aside in the FSA can be considered for the tax credit? Even with one child?

One child, no. The maximum eligible expenses to apply to the credit are $3000. If you already have a DCFSA that is more than $3000, you have exceeded the eligible amount, and you can't get a credit on top of the FSA. If you pay for care for 2 or more children, the expense cap for the credit is $6000, but the maximum FSA is still $5000. So if you max out your FSA paying for care for 2 children, you can apply the remaining $1000 toward the credit (20%, or $200, for most taxpayers).

O

Opus 17

Employee

Sorry, I overlooked that you were asking about income limits for participation.

No, there is no specific limit, but there is a but...

There are special rules for fringe benefit programs if the employee also owns more than 2% of the company. And there are special rules if the employee is "highly compensated" relative to the average employee in the company. These rules apply to the company offering the FSA, and do not apply directly to the employee who wants to enroll. You would have to ask your employer if there are any limitations on your participation. If you are an owner/employee of a S-corp, you should talk to an attorney or benefits specialist consultant before offering any employee benefits, so you properly follow the rules.