My Life in Benefits, Age 30: Parenthood 101

John at 30

This is the third post in our “My Life in Benefits” series. New posts are published the first Thursday of every month in five year increments. Read the first post here.

So far, I’ve shared my experiences about how I saved on my commute and health insurance with tax-free accounts. I constantly have saving on the brain, and even more so now because Sam (my wife) and I are expecting in April. And we’re having twins.

On top of my CBP and my HSA, I can now sign up for a Dependent Care Flexible Spending Account (DC FSA). That’s a mouthful, so I just think of it as a Daycare Account.

Hats are hats. Pants are pants.

If you’re confused by the mention of Daycare in association with an FSA, you’re not alone. We often think of FSAs as being used for qualified medical, dental or vision purchases. But not one penny from a DC FSA can be used for what might be considered traditional qualified expenses (medical, dental and vision).

Roughly one in three people don’t know that a DC FSA is an entirely separate account from a Medical FSA. You have to sign up for it separately during Open Enrollment, and you have to funnel a whole separate chunk of change to the account.

One in three people don’t know that a DC FSA is an entirely separate account from a Medical FSA.

Think of it like this: A Medical FSA is a pair of pants. A Dependent Care Account is a hat. Those two articles of clothing serve very different purposes and you cannot use them interchangeably, no matter how much you might want to. Hats are hats and pants are pants. The same goes for Medical FSAs and DC FSAs (which I will now only refer to as a Daycare Account).

What can I buy with a Daycare Account?

John at 30

I will answer that right after I address who should have a Daycare Account.

There are only two groups of people who should have a Daycare Account:

  • people with kids
  • people taking care of elderly people*

*the elderly people have to be claimed as a dependent on your tax return, otherwise no dice for a DC FSA

I fall into the first category- people with kids. If you have kids, you know they are expensive. (And I thought student loans were bad). Thankfully, a Daycare Account can help me set aside up to $5,000 a year for qualified childcare expenses. (Not all childcare expenses. For example, diapers are not covered, much to my disappointment. You can see a full list of the services that are eligible under a Daycare Account here).

Just to name a few:

  • day care
  • before and after school care
  • a nanny

Both Sam and I work right now. But a Daycare Account also allows you to look for work or go back to school, if need be.

What if I already claim the Child Care Tax Credit?

Good question. It really depends on your situation. In general**, if you make under $30,000 a year, the Child Care Tax Credit will save you more money. If you make over $30,000 a year, the Daycare Account is going to keep more in your pocket.

You may even be able to do both. If you have two or more dependents receiving qualified care under a Daycare Account, you can use the $5,000 from the Daycare Account and claim $1,000 from the Child Care Tax Credit.

**Please consult a tax professional if you are unsure of which option is more beneficial for your particular tax situation.

Can I have an HSA and a Daycare Account?

Yes you can! These accounts are totally separate and have no impact on each other.

How much will I save with a Daycare Account?

That is going to vary based on your salary. I can tell you how Sam and I calculated our savings and you can use our model.

I’ll start with our household income, since a Daycare Account allows you to set aside $5,000 for the household (not per parent).

Our annual household income is $85,000. If we didn’t set aside the $5,000 in the Daycare Account, we would pay about $15,500 in taxes.

We saved $1,200 with the Daycare Account.

How I got that number: We still live in NYC, so our combined Federal, FICA and State tax rate is 20%. (The effective tax rate for Federal is 8%, 7.65% for FICA and 4.32 for State).

But instead, because we did set aside the $5,000, our income for tax purposes is dropped to $80,000 and we only pay $14,300 in taxes.

We saved $1,200 with the Daycare Account.

Saving three times over

At this point, between the CBP for my commute, the HDHP with an HSA for health care and now the Daycare Account, I’m saving literally thousands of dollars every year.

See what you can save with a Daycare Account.