A Child-Care Tax Break for Working Parents

New parents and those with pre-teens can save on taxes (for now) when paying for child care by signing up for an employer's dependent-care flexible spending account.

Question: My husband and I will be having our first baby this spring, and we'll be paying for child care after I return to work a few weeks later. Should I sign up for the dependent-care flexible spending account at my job now, during open enrollment for 2018 or after the baby is born?

Answer: You'll have to wait until the baby is born to sign up for the dependent-care FSA, which will allow you to pay for child care with pretax dollars. But be warned: This tax break is among those slated to be repealed under the newly released tax plan by the U.S. House of Representatives. Until that's final, employers are still offering these accounts.

People usually sign up for their employer's dependent-care FSA during open enrollment in the fall. After that, they have limited options to change their contributions under certain circumstances. But since you haven't had your baby yet, you can't enroll now because you don't have an eligible dependent, says Jody Dietel, chief compliance officer for WageWorks, which administers employers' FSA plans. Check your employer's plan for its specific time frame, but you usually have 31 days after the baby is born to sign up, she says.

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Generally, to qualify for this tax-friendly account, both spouses must be employed (or one can be a full-time student), and they must pay for care for one or more children younger than 13 while working. You can sign up for a dependent-care FSA or revise your contribution level midyear in cases such as a birth or adoption of a child, marriage or divorce, or changes in your residence, cost of care or employment status for you or your spouse that affects eligibility, says Dietel. Check with your employer's plan for its specific rules.

After you have the baby, you'll be able to set aside up to $5,000 in a dependent-care FSA offered by your own or your husband's employer (the $5,000 is the maximum per family, not per person). The money escapes federal income taxes and Social Security taxes, and may avoid state income taxes, too. You'll lose any money you don't use by the end of the year (some employers give you until March 15 of the following year to spend the cash in the account).

But plenty of types of care count, including the cost of a nanny, babysitter, day-care center or preschool while you and your spouse work. School costs aren't eligible when your child reaches kindergarten and older, but you'll still be able to use the FSA money for before-school and after-school care, and even the cost of day camp in the summer or during school breaks, until your child turns 13.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.