Tommy Blackburn, CFP®, CPA, PFS
In response to the American Rescue Plan Act (ARPA), as well as the Consolidated Appropriations Act (CAA), FSAFEDS has announced a Special Enrollment Period from June 1, 2021 to June 30, 2021 for Federal employees to take advantage of these opportunities. See below for communication from FSAFEDS.
The American Rescue Plan Act that was passed in early 2021 included a variety of changes to the Tax Code. Many of these changes are temporary or one-time changes, however we believe that some of the changes may be here to stay. We will continue to keep you informed as we learn more about future tax legislation that may make certain aspects of The American Rescue Plan Act “permanent”.
One of the biggest opportunities is the ability for those with dependent care expenses to use pre-tax dollars through a Dependent Care FSA (DCFSA) to pay for up to $10,500 (Married Filing Jointly) of qualified dependent care expenses (this is an increase from the normal $5,000), such as daycare, pre-school, before and after school care, and summer camps. As we (John and Tommy) have learned, dependent care expenses can quickly exceed $5,000 per year so this is a welcomed change for parents with young children.
For nonfederal employees, please check with your human resources department to see when and how your company benefits may implement this change.
Why contribute?
Contributions to a DCFSA lower your federal and state tax liability. The combined state and federal tax savings will range based on the family income (please see Federal tax brackets below). A family with taxable income of $100,000 would save 22% in federal taxes and 5.75% in Virginia. In addition, the contributions to the DCFSA reduce the amount of wages that are susceptible to the Social Security tax rate of 6.2% and Medicare tax rate of 1.45%. Continuing with our example, this family would receive a combined 35.4% of tax savings on the increase, or $1,947 dollars. This tax savings, combined with the enhanced child tax credit of $1,600 for children under the age of 6, potentially puts an additional $3,547 in the pockets of families with young children.*
Some other opportunities/enhancements:
- The ability to increase or decrease elections during this period (applies to Health Care FSAs, Limited Expense HFSAs, and Dependent Care FSAs).
- The opportunity to enroll if you do not currently participate.
- Automatic enhanced carryover of unused amounts.
Please click here to read the announcement from FSAFEDS with additional info: FSAFEDS Announcement.
Married Filing Joint Federal 2021 Tax Brackets:
| Taxable Income Bracket | Tax Rate |
|---|---|
| $0 to $19,900 | 10% |
| $19,901 to $81,050 | 12% |
| $81,051 to $172,750 | 22% |
| $172,751 to $329,850 | 24% |
| $329,851 to $418,850 | 32% |
| $418,851 to $628,300 | 35% |
| $628,301 or more | 37% |
*Please note, there is also now an enhanced Dependent Care Tax Credit in 2021 and individuals should analyze both a DCFSA and the Dependent Care Credit to determine which is more valuable. In 2021, dependent care expenses of up to $8,000 per child, with a maximum of 2 children and $16,000 of expenses, are eligible for the credit vs. the normal $3,000 per child, with a maximum of 2 children and $6,000). The credit is 50% of expenses in 2021 for those with income under $125,000 and drops to 20% for those with incomes over $185,000, and further reduces once income gets to $400,000 to being eventually 0% once income reaches $440,000.