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Dependent Care Accounts: The best way to save on child and senior care costs

Save up to $2,000 this year by utilizing a Dependent Care Account, which allows you to use tax-free dollars to help pay for child and senior care costs.

Dependent Care Accounts: The best way to save on child and senior care costs

If you’re looking at the cost of child care or senior care solutions, it can be easy to get overwhelmed by hourly and monthly rates, among other expenses. How can you cut down on these costs, you may ask yourself?

For most families, the biggest savings you can attain is by enrolling in a Dependent Care Account, which allows you to use tax-free dollars to pay for dependent care services, whether that’s daycare for your toddler or in-home care for an elderly parent. By taking full advantage of this tax break, you can save approximately $2,000 this year.

What is a Dependent Care Account?

A Dependent Care Account is a type of flexible spending account (FSA) that many employers offer their employees. Many people refer to it as the child care FSA since it can be used toward the cost of child care services, but it may also be used for senior care or adult daycare for a spouse or adult relative who lives with you and is physically or mentally incapable of caring for themselves.

You can put aside up to $5,000 in pre-tax dollars in your Dependent Care Account to pay for dependent care expenses, but generally only one spouse can enroll. The only exception is if you’re married and both you and your spouse file a separate tax return. Then, it’s OK for both of you to put $2,500 in a Dependent Care Account.

How does a Dependent Care Account save you money?

The money you place in your Dependent Care FSA is not subject to any taxes. That means up to $5,000 can be used for your family’s care-related needs without having to account for Social Security, Medicare or income taxes. The savings you will ultimately see varies depending on what your marginal tax rate is. A good approximation is around $2,000 in tax savings, assuming the family uses the full $5,000.

Sample annual tax savings using a Dependent Care Account

Annual cost

Weekly cost

Caregiver’s gross pay



Social Security taxes+ $1,934.40+ $37.20

Medicare taxes

+ $452.40+ $8.70

Unemployment insurance taxes

+ $489.84

+ $9.42

Cost before FSA savings

= $34,076.64

= $655.32

Annual FSA savings

– $2,000.00

– $38.46

Actual total cost

= $32,076.64

= $616.86

Dependent Care FSA for child care and senior care

Your Dependent Care FSA account can be used to pay for eligible dependent care services, which may include:

Child care:

  • Daycare.
  • Preschool.
  • Summer day camp.
  • Before- or after-school programs.
  • Wages for in-home child care providers, like a nanny, au pair or sitter.

Adult care:

  • Adult daycare.
  • Wages for in-home caregivers.

Be sure to check with your tax advisor if you have questions about whether a certain expense is eligible for reimbursement under this program.

Do I qualify for a Dependent Care Account?

There are two guidelines you must meet in order to have care expenses qualify for use in a Dependent Care FSA.

1. Both spouses (or the parent in a single-parent household) must be employed or be full-time students to demonstrate that care is needed to accommodate for those life situations. This is commonly known as the work-related expense test.

2. The person receiving care must pass the qualifying person test as outlined in IRS Publication 503. To summarize, a qualifying person is usually:

  • A child under the age of 13;
  • Your spouse, if they are not physically or mentally able to care for themselves and still lives with you;
  • A person you can claim as a dependent, such as a senior parent, who lived with you for more than half the year because they are not able to physically or mentally take care of themselves.

How do you sign up for a Dependent Care Account?

Talk to your workplace Human Resources department to see if a Dependent Care Account is available to you and how you can get started.

Companies have some leeway in how they manage their FSA program, so it’s important you get all the details from your Human Resources contact. At a minimum, you will usually be required to prove that the expenses applied to a Dependent Care FSA were for care-related needs, so make sure to keep your receipts.