Dependent Care FSA - how to estimate?
howdy all! my wife and I are expecting our first in just a few weeks :) i had an insurance question that came up and wanted to ask the group :) we may have a dependent care FSA available to us through insurance, that allows for up to $5K of childcare expenses to be tax deductible, but i have no idea how much of child care expenses i should think about planning for! these are 'use it or lose it dollars', so i wouldn't want to allocate more than we used.
any thoughts or guidance on how much child care expenses to plan for in 1st year? in our case, we think our childcare needs won't be regular, at most a day a week once my wife goes back to work in 4-5 months. no worries if this isn't something that you can speak to, but thought i'd ask!
Parent Replies
Depends on the city and the type of daycare facility, but $10/hr is what we paid in Albany. You can do the math.
You have until March or so of the following year to use up any leftover funds from the previous year. Even if you only plan to use childcare for one day/week I think you can easily spend more than $5k throughout the year. Just doing the math, 8 hours/week at $20/hour and 52 weeks is $8,320/year.
The most important thing to be aware of: You can only use FSA money for a caretaker that you pay above the table, i.e. with tax withholding, social security, the whole nine yards. Or of course for a licensed daycare, a private school or a summer camp. Pretty much the recipient of you money needs to file taxes and you need to have their SSN/Tax-ID. As it sounds like you are more looking for the occasional sitter than a regular household employee, you might only find candidates that will only work under the table.
My son's daycare for infants was $437 a week, M-F, 6:30 to 6:30. We used the $5k to cover 11 weeks worth of coverage for him.
I think you'll get better responses if you can include the type of care you plan to use and how many hours of it on that one-day-a-week.
Have you looked into who might provide your childcare? If you can identify potential providers then you can ask their rates to get a better estimate When my kids were in full-time infant care at a home daycare in El Cerrito the part-time kids were charged about $70-80/day. I believe going rate for nannies watching one child in our area is $20/ hour. Costs could be more or less in your city. Usually you will pay more on an hourly bases for part-time care than full-time. So if you anticipate a day of week of care for 10 months next year (assuming your wife goes back in February) that might put you in the annual cost range of anywhere from $3,000 - $7,000 depending on local going rates, daycare vs. nanny, and how many hours a day you might need a nanny. As you can see, that $5,000 allowance gets eaten up fast!
So my advice is look at providers in your area for cost and availability, calculate out the minimum number of days you think you will need care (4x times a month, 2x a month, etc.) and then use that figure. If you are worried about not using it all, then round it down a bit. You can always up the amount in subsequent years. For what it's worth we have maxed out our dependent care FSA every year since we've had access to it. The limit is low for the bay area. Good luck!
If you can find a daycare that will accept your baby one day a week, you'll probably end up spending around $5K over the course of the year. (for comparison, infant daycares in Oakland are about $1700/month full time).
As infant daycares are hard to come by and get spots in, you'll probably end up with a nanny. You can only claim the deduction if your nanny is being paid on the books, which many nannies aren't willing/able to do.
You may be better off not setting anything aside next year until your childcare needs are determined. The potential loss from not using the money may outweigh any tax savings.
If you only need one day of care a week, you'll probably be looking at a nannyshare, since many daycares have a minimum number of days. Those average $12 an hour or so these days so you could use that for a ballpark number to decide how much to allocate based on how long you expect the day to be and for how many weeks. If you will need more than a day of care each week, you'll easily go through the full $5K, sadly.
I don't know if this helps, but for 2/3 of the 2017, we were part of a nanny share just 2 days a week. The last 4 months = daycare, 4 days a week.
Needless to say, we're blowing through our FSA. I also was nervous and only set aside 4K. Kicking myself about that last 5K. We would have blown through it, even with the nanny share. We had a good deal and were paying about $700/month for 2 days of childcare.
We now pay $1750/month for daycare, but that's really high--it's a great place. ; )
Hope that helps.
Can't help with the estimate but you should check your plan to see what the grace period is. You might be able to file claims for more than 12 months. (Some plans have a two month grace period.)
I use all $5K for my kid and have since he was in preschool. But there are some restrictions on what kind of childcare you can deduct. I'd suggest checking out the paperwork because I'm not sure if it covers babysitters. I was given a worksheet that explained the difference between deducting it pre-tax and deducting it from my taxes. My guess is that unless your kid is in daycare, it's probably not terribly useful. Since you lose what you don't use, the others would be easier at least until you have regular expenses that you can count on.
Also, welcome to parenthood! Congratulations!