This account permits you to use before-tax dollars for eligible dependent care expenses if you need to pay for dependent care services so that you, or you and your spouse, can work outside the home. Examples of eligible dependent care expenses include:
• Household services related to the care of your dependent.
• The care of your dependent in your home.
• The care of your dependent outside of your home if that dependent regularly spends at least eight (8) hours each day in your home.
The Internal Revenue Service allows you to participate in this account. To qualify for reimbursement of these expenses, the following rules must be satisfied:
• If the expenses are for your child, the child must be under 13 years of age and be claimed as a dependent on your income tax return.
• Other reimbursable expenses must be for your disabled spouse or other disabled individual who is your dependent for tax purposes.
• The services must be necessary to enable you, or if you are married, you and your spouse, to be employed or to go to school on a full-time basis.
• The services may be provided inside or outside your home, but not by someone who is your minor child or your dependent for income tax purposes.
• If services are provided by a day care facility that cares for six (6) or more children at the same time, it must be a licensed day care center.
• The amount reimbursed cannot be greater than the income you or your spouse earns, whichever is lower.
• The services must be for the physical care of the child, not for education, meals, and other service.
Your deposits to your Dependent Care Spending Account can range up to a maximum of $5,000 annually. It is important to remember that the maximum amount that you deposit cannot be greater than the income you or your spouse earns, whichever is lower.
Dependent Care Tax Credit vs. the Spending Account
If you do not pay for all of your dependent care expenses from your spending account, you may be able to take a percentage of those expenses as a credit on your federal income tax return. For one dependent, you may be able to take a percentage of your un-reimbursed dependent care expenses up to $2,400 as a tax credit. If you have two or more dependents, you may be able to take a percentage of your un-reimbursed dependent care expenses up to $4,800 as a tax credit.
Keep in mind that you cannot use both the spending account and a tax credit for the same expenses. Furthermore, your expenses eligible for the tax credit will be reduced, dollar for dollar, by each dollar that is reimbursed from your spending account for dependent care expenses. However, you may be able to coordinate some of your dependent care expenses between the spending account and the federal tax credit. In order to examine your alternatives, you should consult with a tax advisor.
If you want to claim the tax credit or use the spending account, you must get IRS Form W-10, Dependent Care Provider's Identification and Certification, and give it to each of your care providers to fill out and return to you. This form should not be sent to the IRS. Instead, keep it with your records.
On the Form W-10, your care provider (unless tax-exempt) should provide you with its taxpayer identification number. If you claim the tax credit or use the spending account, you must supply the correct name, address and taxpayer identification number of your care provider(s) with your federal income tax return. If you do not furnish correct or complete information to the IRS, you will not be able to claim the tax credit or to use the tax-free spending account unless you show the IRS that you exercised due diligence in attempting to acquire the required information.
See IRS Publication 503, Child and Dependent Expense, for more information at http://www.irs.gov/pub/irs-pdf/p503.pdf for more information.