How a Dependent Care FSA Works

A dependent care FSA lets you set aside up to $5,000 per household (or $2,500 if married filing separately) in pre-tax dollars to pay for care of a child under 13, or a dependent adult who can’t care for themselves, while you work. The money comes out of your paycheck before federal income tax, Social Security tax, Medicare tax, and — in New York — before state and city income tax too.

Your employer sponsors the plan. You elect an amount during open enrollment, and that total gets divided across your paychecks for the year. You submit receipts for qualifying expenses and get reimbursed from the account. Unlike a health FSA, the full amount isn’t available on January 1 — you can only claim reimbursement up to what’s been deducted so far.

The $5,000 Cap vs. NYC Childcare Costs

The federal limit hasn’t changed since 1986. That’s not a typo. Congress set the cap at $5,000 nearly four decades ago and never adjusted it for inflation. Meanwhile, the average cost of infant daycare in New York City sits around $21,000 to $38,000 per year depending on borough and program type.

So the FSA covers somewhere between 13% and 24% of what most NYC families pay for one child’s care. That’s a narrow slice. But the tax savings on that $5,000 add up faster than people realize in a high-tax jurisdiction like New York.

Tax Savings for New York City Taxpayers

A New York City resident in the 24% federal bracket, the 6.85% state bracket, and the 3.876% city bracket saves roughly $1,736 in income tax alone on a $5,000 dependent care FSA contribution. Add the 7.65% you avoid in FICA taxes and the total savings approach $2,119.

That’s real money. It won’t solve the childcare affordability problem, but skipping the FSA means you’re paying for the same care with dollars that got taxed at a combined marginal rate above 40%. There aren’t many guaranteed returns like that.

Compare that to a taxpayer in a state with no income tax — they’d save around $1,583 on the same $5,000. The NYC tax layer adds an extra $536 in savings that city residents leave on the table if they don’t enroll.

What Counts as a Qualifying Expense

The IRS defines eligible expenses under Publication 503. For most NYC parents, qualifying expenses include:

• Daycare and nursery school — full-day or half-day programs for children under 13
• Before- and after-school programs — not tutoring, but supervision-based care
• Summer day camps — overnight camps don’t qualify
• Nanny or au pair wages — you can pay your nanny through the FSA, but you’re still responsible for the nanny tax (Social Security and Medicare as a household employer)

Preschool tuition counts. Kindergarten and above does not, even if the school runs a full-day program. The dividing line is whether the primary purpose of the program is care (qualifies) or education (doesn’t).

Dependent Care FSA vs. the Child and Dependent Care Credit

You can’t double-dip. If you put $5,000 into a dependent care FSA, you reduce the expenses eligible for the Child and Dependent Care Credit by that same $5,000. For most NYC families earning over $100,000, the FSA wins because the federal credit maxes out at 20% of expenses — and it doesn’t shield you from state or city tax.

Lower-income families should run the numbers both ways. The credit percentage ranges from 20% to 35% depending on AGI, and families with AGI under $43,000 get the higher percentages. At those income levels, the credit sometimes beats the FSA. But for the typical dual-income NYC household, the FSA is the better deal.

Common Mistakes NYC Parents Make

The biggest one: not enrolling at all. Open enrollment passes, nobody explains the benefit clearly, and parents pay for childcare with after-tax dollars for the entire year. That’s roughly $2,000 in avoidable tax sitting on the table.

Second: electing too much. The FSA is use-it-or-lose-it. If your child ages out mid-year (turns 13), or you switch to a care arrangement that doesn’t qualify, any leftover balance disappears. Estimate carefully. There is no grace period or rollover for dependent care FSAs — that feature only applies to health FSAs.

Third: forgetting that both spouses need earned income. If one parent stays home, you can’t use the FSA. The account requires that all adults in the household work (or attend school full-time).