The Overlooked Tax Break That Saves Parents Up to $2,500/Year
A High-Earner’s Guide to Slashing Daycare and Camp Costs
If you're a working parent paying for daycare, preschool, or summer camp…
There’s a tax-saving tool you’re probably underusing—or missing entirely.
It’s called the Dependent Care FSA, and for families with childcare expenses, it can be an absolute game changer.
Used right, it lets you pay for qualified childcare with pre-tax income—which can save you up to 37% on every dollar.
In this newsletter, you’ll learn:
What a Dependent Care FSA actually is (and isn’t)
How much you can save based on your tax bracket
What expenses qualify (and the ones that don’t)
A step-by-step guide to use it right
Common mistakes and how to avoid them
Let’s break it down ↓
What Is a Dependent Care FSA?
A Dependent Care Flexible Spending Account (FSA) lets you set aside pre-tax dollars from your paycheck to pay for childcare costs.
This reduces your taxable income, so you're effectively using untaxed money to pay for daycare, preschool, camps, and more.
That means savings on:
Federal income tax
Social Security & Medicare (FICA) taxes
State taxes (in most states)
It’s one of the only ways to save on childcare if you’re a high earner—especially since many families phase out of other credits like the Child and Dependent Care Tax Credit.
How Much Can You Contribute (and Save)?
For 2025, here’s what’s allowed:
$5,000 per household (if married filing jointly or single)
$2,500 per parent (if married filing separately)
Your actual tax savings will depend on your income bracket—but here’s what it can look like:
Tax Bracket Potential Tax Savings
24%~$1,250 – $2,000
32%~$1,600 – $2,300
35%~$1,750 – $2,500
Put simply: if you’re paying for care anyway, this is a no-brainer.
What Expenses Are Covered?
The Dependent Care FSA covers a surprisingly wide range of qualified expenses, including:
✔️ Daycare & preschool
✔️ Before/after-school programs
✔️ Summer day camps
✔️ Babysitters & nannies (as long as they report income)
✔️ Licensed in-home care
But there are some important exclusions too:
❌ Overnight camps
❌ K–12 private school tuition
❌ Babysitters paid under the table
If you’re paying for childcare so you can work, there’s a good chance the expenses qualify.
How to Actually Use It (Step-by-Step)
Using a Dependent Care FSA is relatively simple—here’s your 4-step game plan:
Enroll through your employer during open enrollment (or after a qualifying life event like a new child or job change)
Elect how much to contribute—up to the IRS limit
Submit claims with receipts for reimbursement (or use your FSA debit card if available)
Use the funds before year-end—most plans follow a strict “use it or lose it” rule
Some employers allow a short grace period or a limited rollover (usually up to $500), but most Dependent Care FSAs do not. Plan carefully!
What Happens if You Leave Your Job?
Unlike a Health FSA or HSA, your Dependent Care FSA does not follow you.
If you leave your employer:
You stop contributing immediately
You can only be reimbursed for expenses incurred before your last day
Translation: use it or lose it.
Who Should Use a Dependent Care FSA?
This strategy is a no-brainer if you:
Have children under 13 and pay for daycare, camp, or after-school care
Are in a moderate to high tax bracket
Have two working spouses or are a single working parent
Want to save money without changing your lifestyle
Even if your employer offers both a Dependent Care FSA and the tax credit, high earners generally benefit more from the FSA due to the larger tax savings and phaseout rules on the credit.
Not Every Employer Offers One—Check Now
This is an employer-sponsored benefit—meaning it’s not available to everyone by default.
Ask HR or check your benefits portal during open enrollment
Don’t assume it’s part of your plan—some employers don’t offer it
Final Thoughts: Why It Matters
You’re already spending the money.
The only question is whether you’re doing it tax efficiently - or leaving thousands on the table.
The Dependent Care FSA isn’t some complicated loophole - it’s a legit, IRS-approved tool to help working families cut costs.
And yet, most don’t even know it exists.
So:
Check your 2025 benefits
Elect the full $5,000 if you qualify
Submit your receipts
Keep more of your hard-earned money
It’s one of the easiest wins for working parents. Use it.
See you next week.
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