Dependent Care FSA

[RangerOne]

My wife and I are having a baby and she works part time 2-3 days per week. Here current jobs are planning to let her start working again after 3 months for maternity. At which point we would begin to use part time day care.

I would really like to max out an FSA to the $5000 limit to pay for this as its saves over $2000 a year in taxes getting deducted pre-tax from my paycheck. However there is the slightest risk that if for some reason one of the jobs fails to come through and my wife ends up not working then we won't need that much money in an FSA.

I would hate to lose all of that if the worst happens and we have no need for any daycare...

I was considering that worst case scenario if we ended up not needing the money because my wife wasn't working, I could on paper employ my mother as a care giver and simply have her give us back her salary as a gift... In theory then it would just effectively be like we payed taxes on the whole $5k since they are in the same tax bracket as my wife and I. It would just require a whole lot more paper work....

[Ricksun]

You should read up on the rules...  My understanding is that the expenses have to be incurred for work related expenses.  The care must allow you and your wife to either work, or look for work.  If her job doesn't come through, you would be justified in using it for when she is looking for another job...   But if she decides to not go back to work, it doesn't seem an approved use.

See page 6: https://www.irs.gov/pub/irs-pdf/p503.pdf

All of that aside, the tax complexities of "hiring" your mother doesn't seem worth it for me.  I'd suck it up the first year, and just start the following year once you have stability in your situation.

Good luck to your and your future family!

Ricksun

[Tjat]

FWIW, We are in a situation where my wife is debating returning to work or being a SAHM (odds seemingly increasing on the latter each day). In our case, I'm not funding the FSA, though there is a tax credit for day care to recoup some of the cost (35% of up to $3,000/1 child, $6000 for 2+).

[KCM5]

there is a tax credit for day care to recoup some of the cost (35% of up to $3,000/1 child, $6000 for 2+).

This.

We had some uncertainties as to whether or not we would need child care the first year out child was born. We ended up needing it half of the year and used the dependent care tax credit. It saved us about $1000 and there is no risk of not using it all as you have with the FSA. We use an FSA now and it's more valuable, but if I were uncertain I would use the dependent care tax credit. The dependent care tax credit has the same restrictions (costs must be incurred while both parents are working or looking for work - there may be some allowance for school, too, I can't remember).

[charis]

You can change your FSA contribution anytime during the year with a qualifying event, which includes change in employment/change in cost.  As soon as you know that your wife won't be working, you can stop making contributions.  I was contributing to an FSA and when my husband went from a temporary position to a permanent position, I called the FSA people and upped my contribution to account for the additional cost of childcare.

[mm1970]

My wife and I are having a baby and she works part time 2-3 days per week. Here current jobs are planning to let her start working again after 3 months for maternity. At which point we would begin to use part time day care.

I would really like to max out an FSA to the $5000 limit to pay for this as its saves over $2000 a year in taxes getting deducted pre-tax from my paycheck. However there is the slightest risk that if for some reason one of the jobs fails to come through and my wife ends up not working then we won't need that much money in an FSA.

I would hate to lose all of that if the worst happens and we have no need for any daycare...

I was considering that worst case scenario if we ended up not needing the money because my wife wasn't working, I could on paper employ my mother as a care giver and simply have her give us back her salary as a gift... In theory then it would just effectively be like we payed taxes on the whole $5k since they are in the same tax bracket as my wife and I. It would just require a whole lot more paper work....

When's the baby due?
Check with your company, generally benefits can change with "change in status". So, let's say the baby is due in March and you don't know if your wife will return to work.  So then, you don't sign up for the FSA right now.  But when your wife goes back to work, it's a status change, and you sign up then.  So she goes back to work in June, and you set up your deductions based on that ($5000/28 weeks), assuming that you will hit that number in child care.  3 days a week of infant care here would be $180 to $210 a week, so for 28 weeks that would be *barely* $5000 in some situations. 

You cannot deduct more than you spend.  Never been an issue for me, working FT.  And you can ONLY take credit for care used when working or looking for work.

[RangerOne]

Thanks for all the replies.

The baby is due December 27th. Life events get a month buffer to take action.

It sounds like my best bet is to see if my wife returning to work is counted as a life event, which it should be. As long as she goes back to work we will definitely use and the FSA. Then I should also be able to cancel it if any of us lose our jobs since job loss is another qualifying event.

Worst case is they deny me the ability to kick off the FSA in 2016 and I lose some tax money. Still likely better than losing a large FSA contribution.

[charis]

Thanks for all the replies.

The baby is due December 27th. Life events get a month buffer to take action.

It sounds like my best bet is to see if my wife returning to work is counted as a life event, which it should be. As long as she goes back to work we will definitely use and the FSA. Then I should also be able to cancel it if any of us lose our jobs since job loss is another qualifying event.

Worst case is they deny me the ability to kick off the FSA in 2016 and I lose some tax money. Still likely better than losing a large FSA contribution.

I'd say you need to just call your FSA people and asked them whether your wife returning to work would allow you to enroll in an FSA.  I think changing the contribution amount might be easier (?) than a new enrollment outside the open enrollment period.

In our case, we sign up for an FSA during open enrollment to cover the cost of part time daycare for six months because we knew H would be looking for work or working from Jan to June.  It worked fine because he got a temporary gig from April to June.  Over the summer, he landed a full time position starting in September.  When that happened, I called FSA people to up my contribution to cover another 4 months of daycare.  Qualifying event was "change in cost."