Do you want to save nearly $1,500 in taxes next year?

Headlines about saving money tend to catch people's attention. And in this case at least, it's also possible! If your employer offers an employee benefit called a Dependent Care Flexible Spending Accounts (DC FSAs), you can save nearly $1,500 in federal taxes next year!

What's the catch?

Your employer has to offer this benefit. If you're Active Duty or work for the federal government, it's available to you! Visit FSAfeds.gov to learn more. Many other companies also offer DC FSAs as an employee benefit.

How does it work?

You have to elect how much to fund (up to $5,000) during your employer's open enrollment season. For DoD, that's November 11 through December 9, 2024. You can opt into the DC FSA now to use throughout 2025. The amount you elect is deducted from your paycheck pre-tax and is set aside in the DC FSA. When you incur childcare expenses during 2025, you submit your receipts for reimbursement. When reimbursed, you receive the full value of the expenses (up to $5,000) without any tax withholdings or taxes due.

As with anything tax-related, there are conditions and requirements:

• Both parents must work or be a full-time student to be eligible for the tax deductions.

• You must incur eligible expenses for your dependent(s). This is most commonly used for daycare for kids under the age of 13, but expenses for certain disabled adult dependents are eligible too.

• The daycare expenses must also be incurred in order for the caregivers to work or study. Sorry, a baby-sitter for a date night-- while much needed and deserved-- doesn't count! However, full-time daycare, a nanny, or summer day camps are all eligible. For school-aged kids, before care and after care expenses are also eligible.

• This is a "use or lose" benefit. You must use the entire $5,000 (or other amount you selected) during the benefit period or you forfeit the unused amount. Most employers' standard benefit periods run from January 1 through December 31, and some employers allow an additional grace period through March 15 of the following year. (Employers whose benefit periods are different from the calendar year (such as July 1 - June 30) will have different deadline dates.)

How does this save us $1,500?

For a family in the 22% federal tax bracket (earning about $130,000 through $240,000 in 2025), you get a 22% savings on the $5,000 you put into the DC FSA. That 22% savings means $1,100 more in your pocket. You also saved the 7.65% FICA tax (Social Security and Medicare) on that same $5,000, which means $382.50 more in your pocket. That's $1,482.50 saved, if you don't pay state tax on earned income, such as Tennessee residents (and residents of AK, FL, NH, NV, SD, TX, WA, and WY).

If you do pay state income tax, your savings will be higher. If your household income is in the $74,000 - $130,000 range, your savings will be a bit less (12% federal tax savings plus 7.65% FICA savings means $982.50 in savings- not bad!)

I've used the DoD's DC FSA for our family's 2024 childcare expenses, and I found it to be a fairly straightforward, smooth process. The time required to use it probably added up to between 1 and 2.5 hours for the entire year- that includes opting in last fall, completing the reimbursement forms, and submitting for reimbursements online. Some especially busy parents will decide not to deal with the additional administrative headache, but for most families, the savings of ~$500 per hour of effort is well worth it!