Explore how your Dependent Care Flexible Spending Account can fit into your family’s 2025 summer plans. Understand the key facts and considerations when it comes to confidently navigating this area of your financial life. Feel better prepared that your summer goals are aligned with using your dependent care funds.
Learning Points
Dependent Care Flexible Spending Account: Tax Planning and Summertime Fun
IF YOU’RE LIKE A LOT OF PARENTS RIGHT NOW, the colder, cooped up days of winter can bring thoughts of sunshine and warmer days. If your summertime plans for your children involve summer camps while you and your spouse work, and you have the ability to contribute to your dependent care flexible spending account, take a few minutes to understand how you can potentially reduce the tax sting from those summer camps.
You’ll sometimes hear dependent care flexible spending accounts referred to as a “DCFSA”, dependent care FSA, or simply, as dependent care.
WHEN YOU CONTRIBUTE TO YOUR DCFSA, you do not incur payroll taxes on the contributed portion of your income. This pre-tax benefit account can help reduce your taxes depending on your specific situation.
For example, if you’re a married couple filing a joint return, and you’re firmly in the 24% federal tax bracket, this income reduction could mean saving up to $240 in federal taxes for every $1,000 spent on dependent care with an FSA, subject to taxpayer contribution maximums.
If you elect the DCFSA benefit, you fund it using pretax income that your employer sets aside in a separate account. Because you make your contributions to your DCFSA before that income is taxed, your contributions can potentially lower the amount of your taxable income.
Hopefully this educational resource gives you an actionable framework for your summer planning. Topics like your dependent care FSA, like so many others in financial planning, intersect with the world of tax, make sure you coordinate with a qualified tax professional on your specific situation.
Qualified Expenses
IF YOUR EMPLOYER PROVIDES DEPENDENT CARE BENEFITS UNDER A QUALIFIED PLAN, you may be able to exclude these benefits from your income. Your employee benefits handbook should provide you with this determination. If not, contact your human resources or benefits resource department about whether the benefit plan qualifies.
If you elect this benefit, then you’ll need qualifying dependent care expenses, like daycare costs, during your plan year.
CONSIDER THESE ADDITIONAL SITUATIONS, where a dependent care flexible spending account is a useful option for your family:
- Daycare, nursery school, or preschool
- Before- and after-school care
- Babysitting and nanny expenses
If you pay these expenses for a dependent under age 13, so that you and your spouse can work, explore how you can be reimbursed under your DCFSA plan.
Experiences and services like tutoring, overnight camps, or non-work-related babysitting are not eligible for reimbursement.
Reimbursement and Related Documentation
ONCE YOU HAVE PAID FOR EXPENSES THAT QUALIFY FOR DCFSA REIMBURSEMENT, you will need to complete a claim through your employer’s chosen provider and process. Providing the correct documentation is critical.
Specifically, you’ll want to verify your dependent care provider shares the following documentation:
- Name of dependent receiving care
- Amount you paid for service
- Type of service (e.g. day care, day camp, after-school, elder care, etc.)
- Provider name and address
- Date(s) of service
If you’re looking to learn more about the details of this topic or to explore how it applies to your family’s situation, consider reviewing the IRS’s Publication 503, Child and Dependent Care Expenses. Please note that filing requirements are subject to change by the IRS.
Contribution Limits
CONTRIBUTION LIMITS: In 2025, the maximum amount your household can defer from your compensation to your DCFSA is:
- $5,000 for single taxpayers and married couples filing jointly.
- $2,500 for married couples filing separately.
These limits are household maximums, not individual tax-payer limits.
You and your spouse want to coordinate your contributions so that you do not exceed your respective household limit.
Further, if you receive any employer contributions or subsidies to your DCFSA, these amounts further reduce your household limit.
Now that you understand one of the limiting factors in your dependent care planning, let’s explore another limit in the next section. Specifically, you’ll also want to evaluate how your compensation details could also limit your ability to participate in a dependent care plan.
Use It or Lose It
The ‘use-it-or-lose-it’ rule means you must use all the money in your FSA for qualified expenses within the plan year, or you’ll lose it. Any unused funds in your dependent care FSA can’t be paid out in cash or transferred to other FSAs.
To avoid losing money, it’s crucial to accurately estimate your expenses when setting your annual election amount.
Compensation Limits
If you are categorized as a highly compensated employee (HCE) by your employer, then your maximum dependent care benefit could be reduced.
In the context of your DCFSA in 2025, you are generally considered a highly compensated employee (HCE) if you are:
- A more-than-5% owner of the employer at any time in the current or preceding plan year; or
- An employee who earned more than $155,000 in the prior plan year.
Further, your employer can choose to ignore the second bullet if you, the employee, weren’t also in the top 20% of employees when ranked by pay for the preceding year.
You can also ask your benefits team for a definitive answer on your highly compensated employee status based on your employer’s non-discrimination testing results.
Source: IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits (2025)
Earned Income Considerations
IF YOU OR YOUR SPOUSE DO NOT PLAN TO HAVE EARNED INCOME in 2025, you’ll want to evaluate whether the DCFSA is a benefit you should pursue.
Here’s a quick way to do that. The amount of work-related expenses you use to determine to your eligibility can’t be more than:
- Your earned income for the year if you are single at the end of the year, or
- The smaller of your or your spouse’s earned income for the year if you are married at the end of the year.
Meaning, if you or your spouse plan to have $0 of earned income, you won’t be able to offset any qualified dependent care expenses and should not plan to fund a dependent care flexible spending account.
The Next Step
Are you on track for your short-term goals, like making memories with your family by going on vacations together? How confidently are you approaching saving and investing for your long-term aspirations, like retiring or pursuing a meaningful second career?
We help busy parents and individual professionals like you develop financial plans to address questions like:
- How can we save for a fulfilling retirement beyond our 401(k) plans?
- What does it take to save for the kids’ education and make a lifetime of memories along the way?
- These causes are close to our hearts – what are our options to give even more meaningful support?
As your financial planner in Saint Louis, we can help you get organized and start feeling more confident that you are making progress towards your savings priorities.
Working with your financial planner in Saint Louis can provide you with the right mix of accountability, collaboration, and long-term thinking.
When you know who and what are truly important, we can help you create incredible clarity about your spending and savings priorities. Clarity to confidently save for and spend on what matters.
If you’re ready to take the next step together, let’s talk.
Disclosure
This commentary is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. The information contained herein has been obtained from sources deemed reliable but is not guaranteed and may become outdated or otherwise superseded without notice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.