Dependent Care FSA When Married Filing Separately: What to Know

A Dependent Care Flexible Spending Account (FSA) allows individuals to set aside pre-tax dollars for eligible care expenses. However, when married couples file separately, IRS rules impose stricter contribution limits and eligibility requirements, making it essential to understand these restrictions before enrolling.

Criteria When MFS

When spouses file separately, the IRS limits each person’s Dependent Care FSA contributions to $2,500, half the $5,000 cap allowed for joint filers under Section 129(d)(6) of the Internal Revenue Code. Even if both spouses have access to an FSA through their employers, their combined contributions cannot exceed $2,500 each.

Eligibility also depends on earned income. Since Dependent Care FSAs reimburse work-related care expenses, each spouse must have earned income unless one qualifies as a full-time student or is incapable of self-care. The IRS uses the lower-earning spouse’s income as the maximum allowable reimbursement. For example, if one spouse earns $2,000 annually while the other earns $80,000, only $2,000 in expenses can be reimbursed, making the FSA less beneficial for couples with significant income disparities.

Contribution Rules

Married couples filing separately must coordinate contributions to avoid exceeding limits or losing tax benefits. The IRS enforces a strict $2,500 cap per spouse, and funds cannot be pooled or transferred between accounts. Each spouse must manage their FSA independently, ensuring reimbursements do not exceed personal contributions.

Employers set enrollment deadlines and may allow mid-year adjustments only for qualifying life events, such as a job change or a shift in dependent eligibility. If one spouse underestimates expenses while the other over-contributes, funds cannot be reallocated, potentially leading to forfeiture under the “use-it-or-lose-it” rule.

Unlike Healthcare FSAs, Dependent Care FSAs typically do not allow carryovers. Funds must be used for care services incurred during the plan year, though some employers offer a short grace period for claims.

Qualifying Care Expenses

A Dependent Care FSA covers expenses that enable the account holder and their spouse to work or seek employment. The IRS defines eligible costs under Section 129 of the Internal Revenue Code.

Child Daycare

Eligible expenses include payments to daycare centers, nursery schools, and babysitters, provided the caregiver is not a dependent or the child’s parent. Parents must obtain the caregiver’s name, address, and Taxpayer Identification Number (TIN) for reimbursement claims.

Preschool tuition qualifies, but kindergarten and higher-grade education costs do not, as they are considered educational rather than custodial. Before- and after-school programs are eligible if they primarily provide care rather than academic instruction. Summer day camps qualify, but overnight camps do not.

If a nanny or babysitter is hired, parents may be responsible for payroll taxes under “nanny tax” rules, which require Social Security and Medicare contributions if wages exceed $2,600 in 2023.

Adult Daycare

Care for an adult dependent, such as an elderly parent or a disabled spouse, qualifies if the individual is physically or mentally incapable of self-care and lives with the account holder for more than half the year. The care must be necessary for the filer to work, meaning expenses for companionship or general household help do not qualify unless directly related to the dependent’s well-being.

Eligible expenses include adult daycare centers, in-home care services, and respite care that provide supervision and assistance with daily living activities. However, medical expenses, such as nursing care or physical therapy, are not covered under a Dependent Care FSA and must be paid through other means, such as a Health Savings Account (HSA) or itemized medical deductions.

If a family member is hired as a caregiver, payments may not qualify unless the caregiver is not a dependent and is properly reported for tax purposes.

Household Services

Certain household services qualify if they are directly related to dependent care. This includes wages paid to a housekeeper, maid, or cook if their primary responsibility is providing care rather than general cleaning or maintenance. The IRS requires these workers to be classified correctly for tax purposes, meaning parents may need to withhold payroll taxes and issue a Form W-2 if wages exceed the household employee threshold.

Expenses for cleaning services, lawn care, or home repairs do not qualify. If a caregiver provides both household and child care services, only the portion of their wages related to care is eligible for reimbursement. Parents should maintain detailed records, including work agreements and time logs, to substantiate claims in case of an IRS audit.

Tax Implications

Using a Dependent Care FSA while filing separately affects eligibility for other tax benefits, particularly the Child and Dependent Care Tax Credit (CDCTC). The IRS prohibits double-dipping, meaning expenses reimbursed through an FSA cannot also be claimed for the credit.

The CDCTC allows a percentage of up to $3,000 in expenses per child ($6,000 for two or more), with a sliding scale from 20% to 35% based on adjusted gross income (AGI). Lower-income households may find the credit more beneficial than an FSA, especially if their AGI qualifies for a higher reimbursement percentage.

Dependent Care FSA contributions reduce taxable income, which can impact eligibility for income-based benefits such as the Earned Income Tax Credit (EITC) or the Saver’s Credit. However, reducing taxable wages also lowers Social Security earnings, which may be relevant for individuals close to retirement.

Documentation

Maintaining thorough records is necessary when using a Dependent Care FSA, as the IRS may request proof that expenses meet eligibility requirements. Employers typically require detailed receipts or invoices before processing reimbursements. At a minimum, records should include the caregiver’s name, address, TIN or Social Security Number, the dates of service, and the amount paid.

Taxpayers should retain documentation for at least three years in case of an IRS audit. If expenses are questioned, bank statements or canceled checks alone may not suffice without corresponding invoices. If a household employee is hired, tax forms such as Schedule H (Household Employment Taxes) and Form W-2 must be properly filed. Errors in reporting caregiver payments can result in penalties or disqualification of expenses.

Consequences of Noncompliance

Failing to follow IRS regulations when using a Dependent Care FSA can result in financial penalties, tax liabilities, and potential loss of benefits. If an individual exceeds the allowable contribution limit while filing separately, the excess amount becomes taxable income and may be subject to additional penalties. Employers are responsible for enforcing contribution caps, but errors can occur, requiring employees to correct discrepancies when filing their tax returns.

Misreporting expenses or failing to provide required documentation can trigger IRS scrutiny. If an audit determines that funds were used for non-qualifying expenses, the disallowed amount is added back to taxable income, potentially leading to additional tax owed plus interest. In cases of intentional misrepresentation, penalties may apply, and the taxpayer could lose access to the FSA in future years. To avoid these risks, individuals should verify expenses before submission and ensure all payments are properly documented.