My husband is our family CFO. Last week he had me print out an earnings statement to check our payroll deductions. It’s on our back-to-school checklist. Our income is somewhat variable. We don’t want to end up owing too much money to the IRS next spring, so we check it every year around this time, and we adjust withholding as needed.
There is an additional consideration this year: Dependent Care Flexible Spending Accounts or FSAs. When the American Rescue Plan was passed earlier this year, the Dependent Care FSA contribution more than doubled. This can be a huge benefit for families. It might not be too late to participate, depending on several factors I will cover in this blog post.
When the American Rescue Plan was passed earlier this year, the Dependent-Care FSA contribution more than doubled. This can be a huge benefit for families.
There are many reasons why this benefit might be something to look into. Maybe you are earning more than you were at this time last year or your childcare expenses look differently than they were earlier in the year, or maybe you are getting ready to go back to the office. Since this can be a big deal for many families right now, I wanted to share my research. I hope this information is helpful to others along their journey.
Returning To The Workplace
“This is a great opportunity to finally get a little more benefit and tax savings for those returning to the workplace,” says Debbie Leonard, CPA, CCIM, Partner at Thill & Leonard, CPAs, LLC. Debbie is our CPA. As I was researching for this piece, I reached out to her. She had many helpful insights during our recent conversation, including many you will find in this article.
First off she offered me these 6 FSA Guidelines for this year’s unique dependent care benefits. Later in this article I’ll share more details about the FSA Dependent Care benefit itself, along with the changes enacted by recent legislation. When I asked her, Debbie was gracious to let me pass along her guidelines. Everyone’s situation is unique, so I have included her contact details in the reference section at the end of this article in case you want to contact her about your situation*.
Six FSA Dependent Care Guidelines
1. One Change Rule
For someone able to participate in an FSA, it is important to note that you should be able to make ONE change during the plan year without a significant event (marriage, birth etc.) I include more details about this later in this piece.
2. Unused Carry Forward
The Act also allows unused amounts from 2020 to be carried to 2021 since dependent care may not have been necessary during the pandemic. These amounts should be considered when increasing your election, Debbie says.
3. FSA vs Tax Credit
A benefit of the FSA over the dependent tax credit is that any number of children may be cared for with the FSA funds. The dependent tax credit is limited to 2 children with a maximum per child. Both programs can be used together. More details are included in #5.
4. 2021 Calendar Year
While most FSA plans are calendar year, many are not. Regardless of the plan year, the $10,500 limit is only for calendar year 2021. This could provide issues when determining how much to elect. If you have a non-calendar year end plan, it is not 100% clear so it’s best to ask the plan administrator. According to Debbie, the consensus right now is that the expenses incurred through December 31, 2021, are eligible for the higher threshold.
5. Excess Expenses
The excess expenses may be eligible for the dependent tax credit, based on expenses up to $8,000 per child, 2 children max (as noted in #3 above). The top amount of credit has increased from 35% to 50% as well, Debbie says. Remember, the care provider information, including their social security number (SSN) or employer identification number (EIN) is reported on your tax return. This applies whether it is through an FSA or the tax credit.
6. Not Permanent
While this new dependent care FSA benefit is only designated for 2021, politicians know that once you increase benefits, especially with benefits providing family assistance, it is hard to take them away. It could be one of the provisions that will be made permanent in future tax legislation, Debbie says.
The 2021 FSA Dependent Care Benefit
While researching this topic, I came across an article by Kate Dore, a CNBC personal finance reporter in Nashville. I’ve paired some of her notes on this topic, alongside insights from Debbie.
Dependent-care FSAs reduce an employee’s gross income by putting money into an account that is used for daycare, after-school care, work-related babysitting, summer camp, etc. Money in the account can be used to cover care expenses for children, as well as for disabled adults. Debbie says the disabled adult must be someone you claim on your income taxes in order for their expenses to qualify.
Since the money goes in before taxes are taken out, employees may save on payroll taxes. The American Rescue Plan increased the amount families may contribute from $5,000 to $10,500 during the 2021 tax year, Kate says. We don’t know if the amount will remain at $10,500 going forward, as stated above.
It May Not Be Too Late
Even though it’s the first of August, it might not be too late to sign up for this benefit.
There may be time so long as you haven’t already made a change this year, says Debbie. There are special rules this year allowing you to make one change in your FSA deduction amount, outside of the regular benefits enrollment period. This applies even if you haven’t had a significant life event, like a marriage, divorce, or birth of a child.
Families should evaluate their entire income tax situation to see if they can take advantage of this tax-saving opportunity. It is also important to check with your employer to see if they offer the increased amount. It is optional for employers to participate in the increased FSA benefit program.
Not all employers offer a Dependent Care FSA in the first place. Among the ones who do, not all employers chose to offer the increased contribution limit this year. If you believe it would be of benefit to you after you check with your CPA, it might be in your best interest to ask your employer and find out if this is an option for you.
Scenario One: Filing taxes jointly
If you decide to participate in the additional FSA benefit, there are other steps you may take to maximize the impact to your family. Kate says in her article if both parents are working and both employers offer dependent-care FSAs with the new $10,500 limit, couples who file jointly may benefit most by using the lower-earning spouse’s FSA.
The reason for this is because lower earners may save more in Social Security and Medicare payroll taxes. Here is an example Kate shares.
Social Security tax (6.2%) applies to the first $142,800 of 2021 income. Medicare tax (1.45%) applies to all income, with an added .09% for those making over $200,000.
For example, let’s say one spouse earns $225,000 and other earns $75,000. The spouse earning less than $142,800 pays for Social Security and Medicare taxes, for a total of 7.65%.
However, the spouse earning $225,000 pays for Medicare (1.45%) plus the additional Medicare (.09%), on income over $142,800, thereby slashing that person’s overall payroll tax rate to 2.35%.
In this scenario, Kate explains, the lower-earning spouse may save more on payroll taxes by deferring $10,500 into their employer’s dependent-care FSA.
Scenario Two: Filing taxes separately
Some couples choose to file taxes separately. Kate says it might be to lower payments on income-driven student loan repayment plans. Others do so to qualify for the 2021 stimulus tax credits.
“In the student loan scenario, it may be better to use the dependent-care FSA of the spouse with student loans,” Kate says.
“Couples may need to run the numbers to see which options offer the highest tax savings.”
*Additional Notes on FSA Dependent Care
Debbie offered her guidelines to me, based on our family situation. As with any financial advice, everyone’s situation is unique, and these guidelines may not apply to you. I pass her suggestions on to my family and friends who have young children, and I’m passing them along to you as something to think about.
Before making any significant financial decision, you will want to check with your CPA or financial planner.
At Aspyre Wealth Partners® we are fee-only fiduciaries. We customize financial advice, starting with you and your why. If you are a business executive or an emerging leader and you don’t have a financial plan or a financial advisor, please reach out. I would like to schedule a time to talk. The first meeting is complimentary, and our objective is to see if we might be able to help you Master What’s Next® in your life. If we aren’t the right fit for you, we may offer an introduction to someone else who might be better suited for you.
In closing this post, I bid you good luck with all the items on your back-to-school checklist. Summer is going quickly, and I can’t believe we are moving our youngest daughter into her dorm room soon.
I’ll share more about managing those emotions and that transition in another post. Stay cool out there.
After spending 25 years as a business executive, bioscience organization CEO, wife and mom, Angela Kreps is Chief Connector at Aspyre Wealth Partners® since 2019. Angela resides in Overland Park with her husband and daughters. In 2020 she became a primary caregiver for her aging mother who moved in with her family during the Covid-19 pandemic. Angela shares professional and personal insights from her journey to help others Master What’s Next® in their own lives.
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- https://www.cnbc.com/2021/03/12/flexible-spending-account-rules-are-more-generous-what-to-know.html An article about new FSA rules by Sarah O’Brien
- https://www.cnbc.com/2021/05/25/how-couples-can-maximize-their-dependent-care-fsa-.html An article about maximizing Dependent Care FSA’s by Kate Dore
- https://www.meetbreeze.com/blog/flexible-spending-account/#:~:text=%202021%20Flexible%20Spending%20Account%20%28FSA%29%20rules%20%26,With%20the%20changes%2C%20employees%20can%20change…%20More%20 An article about FSAs by Bob Phillips
- Thill & Leonard, CPAs https://thillandleonard.com/about/
- Connect with Debbie Leonard, CPA, CCIM on LinkedIn linkedin.com/in/debbie-leonard-cpa-ccim-8a99501a
- Schedule time with Angela https://go.oncehub.com/AngelaKreps