What is the FSA Dependent Care Max Contribution?

A Dependent Care Flexible Spending Account (DCFSA) is a benefit account offered by some employers that allows you to set aside money for dependent care costs before taxes are taken out of your paycheck. This process reduces your total taxable income, which can lead to savings on federal income, Social Security, and Medicare taxes. The purpose of this account is to make it more affordable to pay for the care services necessary for you and your spouse to work or actively look for employment.

The funds contributed to a DCFSA are not just for child care but can be used for the care of any qualifying dependent. Your employer will deduct the amount you elect to contribute from your regular paychecks. These funds are available for you to use for eligible expenses during the plan year. It is a “use-it-or-lose-it” type of account, meaning funds not used by the end of the plan’s grace period are forfeited.

Dependent Care FSA Contribution Limits

The Internal Revenue Service (IRS) establishes the maximum amount you can contribute to a Dependent Care FSA each year. For 2024 and 2025, the annual contribution limit is $5,000 for individuals who are single, head of household, or married and filing a joint tax return. This is a household limit, so even if both spouses have access to a DCFSA through their respective employers, their combined total contributions cannot exceed this $5,000 maximum.

For married couples who choose to file their taxes separately, each spouse is limited to a maximum contribution of $2,500 to their individual Dependent Care FSA. This brings their total household contribution to the same $5,000 ceiling. These limits are set by federal regulation and are not subject to annual inflation adjustments.

Any contributions made by an employer to your DCFSA also count toward the annual maximum limit. For example, if your employer contributes $1,000 to your account, you can contribute $4,000. Some employer plans may also impose their own lower limits, so check your company’s plan documents.

The IRS also has specific rules for “highly compensated employees.” Company plans must pass nondiscrimination testing to ensure the benefit does not unfairly favor these higher earners. If a plan fails this testing, the contribution limits for highly compensated employees may be reduced.

Qualifying Dependents and Expenses

Qualifying Dependents

To use DCFSA funds, the care must be for a “qualifying dependent.” The most common qualifying dependent is a child who is under the age of 13. Once a child turns 13, they are generally no longer considered a qualifying dependent, unless they are physically or mentally incapable of self-care.

The definition also extends to other family members. A spouse who is physically or mentally unable to care for themselves is considered a qualifying dependent. This also applies to any other individual who qualifies as your tax dependent, is physically or mentally incapable of self-care, and lives in your home for more than half of the year.

Qualifying Expenses

The expenses for a dependent’s care must also meet specific IRS criteria. The expense must be incurred to enable you (and your spouse, if married) to work or look for work. Common eligible expenses include:

• Payments for daycare centers
• Preschool programs
• Before- or after-school care
• The cost of a nanny or au pair whose services are for dependent care

During the summer, the cost of a day camp is an eligible expense, but the cost of an overnight camp is not. Similarly, tuition for kindergarten and higher grades is not a qualifying expense as it is considered an educational cost. Incidental costs, such as fees for late payments or meals provided by a caregiver, can be included if they are part of the overall care service.

Interaction with the Child and Dependent Care Tax Credit

Taxpayers have another option for offsetting care costs: the Child and Dependent Care Tax Credit. You cannot use the same expenses to gain a benefit from both a Dependent Care FSA and this tax credit. This prevents “double-dipping.” You must choose which benefit to apply to each dollar of your dependent care expenses.

The Child and Dependent Care Tax Credit is a nonrefundable credit that directly reduces your tax liability. The amount of the credit is calculated as a percentage of your work-related dependent care expenses. This percentage varies based on your adjusted gross income (AGI). The maximum amount of expenses you can use to calculate the credit is $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals.

A DCFSA provides an upfront tax benefit by reducing your taxable income, which lowers your federal income tax and FICA tax liability. The tax credit is applied when you file your taxes. Generally, higher earners in higher marginal tax brackets may find the immediate tax savings from a DCFSA to be more advantageous.

You can use both programs in the same year, but not for the same expenses. For instance, if you have two children and $8,000 in total care costs, you could use $5,000 of those expenses through your DCFSA. You could then use the remaining $1,000 of expenses toward the Child and Dependent Care Tax Credit. This requires careful planning to maximize your tax benefit.