Dependent Care FSA vs. Dependent Care Tax Credit

It’s natural to want the best care for your children and dependents. Fortunately, you can save money on daycare expenses without sacrificing quality. If your employer offers a dependent care FSA plan, your contributions can lower your taxable income. In addition, the dependent care tax credit can cut down your taxes due when you file. Here are the details on each and tips on using both simultaneously.

A financial advisor can help you create a financial plan for your family’s needs and goals.

What Is a Dependent Care FSA?

A dependent care FSA is an employer-sponsored account into which you can deposit pre-tax dollars from your paycheck to pay for dependent care expenses. Generally, care expenses for children under age 13 and minors or adults unable to care for themselves qualify for this account.

Like contributions to a 401(k) or healthcare FSA, dollars go into your dependent care FSA before taxes, lowering your taxable income. In addition, the federal government limits these contributions to $5,000 per year for joint and individual filers and $2,500 for those married filing separately. Although these amounts temporarily changed in March 2021, the government reinstated the limits going into the 2022-2023 tax year.

Benefits of Dependent Care FSA

Contributing to a dependent care FSA offers significant tax benefits for families. By contributing pre-tax dollars, you effectively reduce your taxable income, potentially moving you into a lower tax bracket. This means every dollar you set aside for childcare or adult dependent care expenses goes further, creating meaningful savings throughout the year.

Federal and state tax advantages. Since you deposit pre-tax dollars into the account, you reduce your taxable income and can even drop a tax bracket, depending on your financial circumstances.
Your dependent care FSA deposits allow you to pay for childcare up front and structure your budget more efficiently.
Some employers enhance the benefits of Dependent Care FSAs by offering matching contributions. This essentially provides free money toward your dependent care expenses. Check with your company’s benefits department to see if matching is available, as this can significantly increase the value of your FSA.

Drawbacks of Dependent Care FSA

While a Dependent Care Flexible Spending Account (FSA) offers valuable tax advantages for families managing childcare or adult dependent care expenses, it’s important to understand its limitations before enrolling. Here are some potential pitfalls to keep in mind:

One significant limitation of Dependent Care FSAs is the strict use-it-or-lose-it rule. Unlike some other tax-advantaged accounts, any funds remaining in your Dependent Care FSA at the end of the plan year typically cannot be rolled over. This means careful planning is essential to avoid forfeiting your hard-earned money.
If your employer doesn’t offer this account, there is no other way to get one.
Your FSA can only pay for qualifying expenses while you’re working.
Leveraging your FSA will likely require you to keep receipts, manage reimbursements and pay for ineligible expenses like childcare for nonwork-related purposes.

What Is a Dependent Care Tax Credit?

SmartAsset: Dependent Care FSA vs. Dependent Care Tax Credit

The dependent care tax credit is a tax benefit based on childcare expenses. Like dependent care FSAs, the dependent care tax credit is for care expenses for children younger than 13, plus minors and adults unable to care for themselves.

For the 2025 tax year, you can claim $5,000 in expenses for one dependent or $6,000 for two or more dependents. Qualifying expenses include those you paid for someone other than your spouse or the child’s parent to care for your dependent while you worked or looked for work. A portion of the 20% to 35% expenses will apply to your tax refund.

Benefits of Dependent Care Credit

The Dependent Care Credit offers significant financial relief for families managing childcare expenses while working or seeking employment. The dependent care tax credit helps taxpayers in the following ways:

When filing your tax return, you can reduce your taxes due by a specific amount.
Even if you earn significant income, this credit will reduce your taxes (although the benefit will be smaller than that of a family with a more modest income).
By offsetting childcare costs, the Dependent Care Credit supports parents’ ability to remain in the workforce. For many families, childcare expenses can consume a substantial portion of income, sometimes making employment financially challenging. This credit helps bridge that gap, enabling parents to pursue career opportunities while ensuring their children receive appropriate care.

Drawbacks of Dependent Care Credit

While the Dependent Care Credit offers valuable tax relief for families managing childcare expenses, it comes with several limitations worth understanding. This tax benefit, designed to offset costs related to care for children or disabled dependents, isn’t always as advantageous as it might initially appear.

You can’t claim expenses beyond $5,000 for a single dependent.
The credit is not refundable, meaning it can’t increase your tax return. It can only reduce the taxes you owe.
Your income affects how much you’ll benefit from the credit.
You pay your taxes and childcare costs throughout the year without assistance.

Can You Use Both Dependent Care FSA and Dependent Care Tax Credit?

While you can technically qualify for both benefits in the same tax year, IRS regulations prevent “double-dipping” on the same expenses. This means you cannot use both tax advantages for identical childcare costs. However, strategic planning may allow you to utilize both programs in certain situations. In other words, the same dollars can’t count for both benefits.

If you have access to a Dependent Care FSA through your employer, you might contribute up to $5,000 per year (for married couples filing jointly). Any qualifying expenses beyond this amount, up to the Dependent Care Tax Credit limits, could potentially be eligible for the tax credit. This coordination requires careful documentation and calculation during tax preparation.

For most families, it makes financial sense to first utilize the Dependent Care FSA since it reduces both income and payroll taxes. After exhausting FSA funds, additional qualifying expenses might be eligible for the Dependent Care Tax Credit. Your specific tax situation, including income level and total dependent care expenses, will determine which approach offers the greatest benefit.

Dependent Care FSA vs. Dependent Care Tax Credit: Which Is Right for You?

If your employer offers a dependent care FSA, you will likely benefit by contributing to it. You’ll lower your taxable income and pay for dependent care simultaneously. Reducing your taxes up front is usually more beneficial because the dependent care tax credit lowers your taxes due, but doesn’t increase your refund.

Plus, dependent care will probably cost you more than $5,000 annually. So, you can claim out-of-pocket expenses for your dependent care tax credit, taking advantage of both tools.

When choosing between a Dependent Care FSA and Dependent Care Tax Credit, consider calculating the tax benefits of each option based on your specific financial situation. Some families may even benefit from using both options strategically, though expenses can’t be double-counted.

Bottom Line

Working parents and caregivers have two tax-advantaged options for care-related expenses. Generally, the dependent care FSA is more helpful because it reduces your taxable income instead of your potential taxes due. However, your employer must offer the dependent care FSA for you to access it. On the other hand, any working caregiver can apply for the dependent care tax credit when they file. Combining the benefits of both can mitigate the financial burden of paying for dependent care and lower your taxes.

Tips for Dependent Care FSAs and Tax Credits

Navigating your dependent care expenses optimally isn’t always obvious. Taxes are complex, and everyone’s financial circumstances are different. A financial advisor can help you create a plan to pay for dependent care expenses in the most tax-advantaged way. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Parsing out qualifying expenses and dependents can be challenging. To ensure you make the most of your tax return, use this guide on the IRS rules and exceptions for claiming tax dependents.

As a result, your FSA contributions lower your taxable income. Plus, when you file taxes, you can use up to $3,000 of your out-of-pocket expenses not paid by your FSA to lower the amount of taxes you might owe.” } },{ “@type”: “Question”, “name”: “Dependent Care FSA vs. Dependent Care Tax Credit: Which Is Right for You?”, “acceptedAnswer”: { “@type”: “Answer”, “text”: “If your employer offers a dependent care FSA, you will likely benefit by contributing to it. You’ll lower your taxable income and pay for dependent care simultaneously. Reducing your taxes up front is usually more beneficial because the dependent care tax credit lowers your taxes due but doesn’t increase your refund.

Plus, dependent care will probably cost you more than $5,000 annually. So, you can claim out-of-pocket expenses for your dependent care tax credit, taking advantage of both tools.” } }]}