Dependent Care Flexible Spending Account (DCFSA)
For individuals or families with dependents, a Dependent Care Flexible Spending Account (DCFSA) is another way of minimizing the amount of income that is subject to tax for money you will spend; but there is a twist. Flexible Spending Accounts operate with a "use it or lose it" policy, meaning that you must use all of the money you deposited into the account for qualified expenses by the end of the plan year or you will lose your money.
"Properly managed, a DCFSA can cut your tax bill significantly, especially favoring high income families."
Another factor is that Dependent Care Flexible Spending Accounts must be set up by an employer and funded via payroll withholding. Then the individual or family pays the actual expenses out-of-pocket and submits a claim form with receipts for reimbursement. There is some planning involved with any flexible spending account and the benefits of using a DCFSA also needs to be weighed against (or in combination with) the benefits of the IRS Dependent Care Tax Credit.
Parents who work and have children in daycare are easily able to forecast their annual out-of-pocket dependent care costs and frequently have expenses over the contribution limits ($2500 individual / $5000 married) which eliminates the risk of losing unused funds. Properly managed, a DCFSA can cut your tax bill significantly, especially favoring high income families.