Whether you’re taking care of multiple children, a disabled spouse, or elderly parents, you’ve likely experienced the high cost of dependent care firsthand. With expenses from babysitters to after school programs, it can be difficult to stay ahead of all your other financial obligations while spending on dependent care.
To help make dependent care more affordable, President Donald Trump has included a new provision in his child care plan: the Dependent Care Savings Account. It’s a tax-favored account that anyone with dependents can contribute to in order to save for eligible expenses. Read further to learn exactly what it is, how it works, and who will benefit from it.
What Is The New Dependent Care Savings Account?
Trump’s child care proposal includes creating a Dependent Care Savings Account (DCSA). Parents can contribute up to $2,000 per year to this tax-favored account. Contributions are tax deductible and grow tax-free. Much like a Health Savings Account (HSA), money in a DCSA doesn’t expire. Unused contributions can even be used for a child’s college education expenses once he/she reaches 18.
How Does The Dependent Care Savings Account Work?
DCSAs will be available to everyone regardless of employment status. They won’t be tied to employer accounts.
As previously stated, the maximum annual contribution for DCSAs will be $2,000. Unlike employer-sponsored Dependent Flexible Spending Accounts, unused money in a DCSA will be allowed to carry over year after year. In this way, substantial amounts of money can be accumulated for future dependent care expenses.
Examples of eligible dependent care expenses include:
- After school programs
- Disabled Spouse
- In-home care
- Elderly Parents
- Adult day care
- Assisted living
The exact details on how claims will be processed and reimbursed have not been released yet. We suspect it’ll operate similar to an HSA, but on a federal level.
Who Does The Dependent Care Savings Account Benefit?
Anyone who spends money on dependent care can take advantage of the DCSA and reap the tax benefits.
It should be noted that dependents include disabled spouses and elderly parents, not just children. This broadens the applicability of the money put into the account and makes it all the more easy to use it for eligible expenses.
Low-income parents will receive an additional benefit when using DCSAs. The government will match half of the first $1,000 contributed each year. That’s $500 in additional benefits each year.
Trump hasn’t laid out the specific details on how he plans to fund the government match for contributions made by low-income parents. That, however, would come at a large cost. Over 40% of American households have children. If every low-income parent contributed to DCSAs up to the government match, he would need to find a viable way to fund all of those accounts.
His general answer to the funding question is that it’ll be “offset by additional growth.”
It’s important to note that in order for DCSAs to have a large scale impact in reducing the cost of dependent care for American families, parents will need to take advantage of the account and contribute to it. Given that participation in FSAs and HSAs has been increasing, the outlook seems promising.
The $500 government match for low-income parents is a lofty provision but may be underutilized in reality. Low-income families may have a hard time coming up with the disposable income to contribute to a DCSA in the first place.
President-elect Trump’s child care plan, specifically the creation of the Dependent Care Savings Account, depends largely on utilization rates. We have our eyes peeled to see how this change affects finances for the U.S., especially families with children or elderly parents.
Updated January 1, 2018 and originally published November 12, 2016.