Did you know that in the U.S. there are more babies born during the summer than any other season of the year? It’s one of the reasons that demand for professional childcare reaches a peak during the summer. So, it’s a good time to remind everyone about Flexible Spending Aaccount enrollment. For families who have just given birth – or are about to welcome a new member to their household – this edition of The Legal Review local placement agency,nanny,, Memorial Day, placement counselor, tax and payroll obligations, will share a simple tip worth as much as $1,500.The Situation
A couple gave birth to their first child on April 19. In early May, they began working with a local placement agency to find a nanny so the mom could go back to work after Memorial Day. With about a week to spare, they found the perfect nanny. As the family worked with the agency to finalize the employment paperwork for their nanny, the family’s placement counselor provided them with information about their tax and payroll obligations as a household employer and shared the good news about tax breaks. The family told her that they had not enrolled in their company’s Flexible Spending Account but would do so in the subsequent year.
Families with childcare expenses are entitled to tax breaks to help offset some of the costs. There is no income restriction on the tax breaks, so all families qualify as long as their children are under age 13 and both spouses are working, looking for work or are full-time students.
The most lucrative tax break is the Dependent Care Account (also referred to as “Flexible Spending Account” or “FSA” as part of a company’s “Cafeteria Plan”). If one of the spouses has access to this benefit, the family will be able to pay for up to $5,000 of childcare expenses using pre-tax dollars. That means the family has no taxes on that portion of their income. This benefit saves most household employers between $2,100 and $2,300 per year, depending on the state they live in and their marginal tax rate.
Enrollment in the FSA is limited to once a year (most companies do open enrollment in the fall for the subsequent tax year). However, there is a 30-day window after “life-changing events” where the family can enroll mid-year and the birth of a child is one of the qualifying events. If families miss that window, they can still take advantage of the Child and Dependent Care Tax Credit when they file their federal income tax return. However, this tax break saves a maximum of $600 per year for families with one child or $1,200 per year for families with two or more children.
Upon speaking to the HR person, the family learned more about the 30-day window for life-changing events and they were able to enroll in the FSA program for the current tax year. Given the family’s marginal tax rate, they will be able to take advantage of $2,100 in tax savings for the 2013 tax year.
Without that tip from the counselor, the family would have missed the enrollment window, which would have forced them to settle for the Child and Dependent Care Tax Credit’s $600 worth of tax savings. That $1,500 of additional savings will pay for a lot of diapers and baby food!
How to Ensure Your Familily Maximizes Your Tax Savings
Unfortunately, it is extremely common for families to miss out on enrolling in an Flexible Spending Account after the birth of a child. As first-time parents become first-time employers, there is a lot of new information to process and 30 days is not a lot of time to know everything about being a household employer.
That’s why our partnership with Breedlove & Associates offers the families who are working with us a New Employer Orientation free of charge. This 10-minute, no-pressure, no-obligation phone call allows a Breedlove & Associates tax expert to assess the family’s unique situation and provide guidance on all the tax and labor law issues that will come into play for them. Whether they decide to use their comprehensive payroll, tax and HR service or not, this guidance will likely save them thousands of dollars and dozens of hours.