Dependent Care Benefits

Dependent care benefits are provided by an employer to an employee for use in caring for dependents, such as young children or disabled family members. Dependent care benefits may include flexible spending accounts, paid leave, and tax credits and can be worth thousands of dollars to those who are eligible for them.

Dependents, according to the Internal Revenue Service (IRS), are treated as an exemption credit that may be claimed on an annual tax return. On its own, the dependent credit can reduce a filer's taxable income by thousands of dollars. Children are the most commonly claimed dependent, though dependent care benefits may be extended to a variety of people given that they meet several stipulations. For example, dependents may also be relatives, roommates, or even romantic partners. The IRS provides a guide on who may be claimed as a dependent.

Dependent care benefits are available to individuals who have children of preschool age. Such benefits may take the form of child care tax credits or a dependent care flexible spending account (FSA). Each provides tax savings based on money spent on child care.

Dependent care benefits are part of an overall employee benefits system as administered by the IRS. A tally of such benefits may be found in box 10 of a taxpayer's W-2 form.

A dependent care flexible spending account is available for individuals who care for a child or adult who is incapable of self-care, who lives in the taxpayer's home for at least eight hours each day, and whom can be claimed as a dependent on an income tax return. These accounts allow individuals to pay for qualified child and dependent care expenses while lowering their taxable income. Such FSAs are set up by an employer. Participants authorize their employers to withhold a specified amount from their paychecks each pay period and deposit the money in an account. Instead of using the FSA money to pay for expenses directly, those costs are paid out-of-pocket and a reimbursement must be applied for. For more information, such as which expenses qualify and do not qualify, see Investopedia's guide to dependent care FSAs.

The Child and Dependent Credit is a tax credit is available to taxpayers who have paid someone to care for their child, spouse or dependent to work or look for work. For more, see the IRS's Child and Dependent Care Credit informational page, which includes eligibility and timing requirements, how much can be claimed, and information on which forms to complete. As of 2018, up to $3,000 worth of expenses may be claimed to claim the credit for a single dependent ($6,000 for more than one dependent). This tax credit (not a deduction) reduces the tax burden of eligible taxpayers dollar for dollar.

As of 2018, paid family leave was available to about 14% of workers through their employers. Such benefits are available to residents of New York, New Jersey, Rhode Island, Washington, California and Washington, D.C. Most workers are eligible for the Family and Medical Leave Act (FMLA), which offers up to 12 weeks of unpaid leave per year to care for family members.