How Physicians Can Save Money With a Dependent Care FSA

Many medical specialties have grueling or inconsistent hours, leading physicians to rely on care services for their children and aging parents. Of course, paying for that care can get pricey, but there’s a powerful and underutilized tool physicians can leverage to save on dependent care costs: a dependent care flexible spending account (DCFSA).

A tax-advantaged Dependent Care FSA can provide significant savings and help physicians reduce taxable income and manage care expenses efficiently. DCFSAs would be offered by an employer, and you can elect to fund one during your annual open enrollment period, or following a qualifying life event like the birth of a child.

Let’s get into the benefits and limitations of DCFSAs, and why they may be a powerful tool in financially navigating caretaking.

Additional resources on Offcall: How Physicians Can Financially Prepare for Parenthood

Health Care FSA vs. Dependent Care FSA: Key Differences

The term FSA might look familiar. It typically refers to health care Flexible Spending Accounts (FSAs), which are also employer-sponsored, tax-advantaged plans. The core difference between a health care FSA and a dependent care FSA is how the funds can be used:

• Health Care FSAs help cover unreimbursed medical expenses (such as copays and prescription medications).
• Dependent Care FSAs help pay costs of caring for the employee’s children, parents, or other relatives (such as day care) that aren’t covered through other dependent care benefits, such as state aid or disability insurance.

Health care FSAs and dependent care FSAs also carry different contribution and carryover limits. In 2025, the health care FSA maximum contribution is $3,300, and the dependent care FSA maximum contribution is $5,000. Up to $660 of unused health care FSA funds can be carried into 2026, while no amount of unused dependent care FSA funds can be carried over. Note that some employers limit or entirely disallow health care FSA carryovers.

What Costs Are Covered Under a Dependent Care FSA?

A dependent care FSA is an employer-sponsored, tax-advantaged account that people with dependents — such as children and elderly parents — can use to offset the steep costs of care. Dependents are defined as children under age 13 and spouses or relatives who are incapable of caring for themselves.

Having a dependent care FSA allows you to contribute up to $5,000 pre-tax annually to be used to pay costs including:

• Adult or child day care
• Transportation between home and day care
• Preschool tuition
• A nanny or babysitter

You contribute to a dependent care FSA by telling your employer how much you want to set aside from each paycheck to fund the account. The money you contribute isn’t subject to federal or state income, Medicare, or Social Security taxes. You access the funds by reimbursing yourself as you incur eligible expenses.

A few notes about that $5,000 annual contribution limit:

• It’s a per-household limit. Unlike health care FSAs and health savings accounts (HSAs), the dependent care FSA applies per household, not per health care plan or per spouse. Put another way, you can’t double your dependent care FSA contribution by you and your spouse each opening dependent care FSAs. Spouses that file their taxes separately can each contribute up to $2,500 per year to a dependent care FSA.
• It’s inclusive of employer and employee contributions. It applies to both your and your employer’s contributions. If your employer generously contributes $500 to your dependent care FSA, you’re left to contribute up to $4,500.
• It can’t be carried into a future year. The money you contribute in 2025 can’t be carried into 2026. Contribute only what you plan to spend, and not a penny more. Unused funds typically are forfeited to your employer.

Child and Dependent Care Tax Credit vs. Dependent Care FSA Benefits

The child and dependent care credit allows taxpayers of any income level a dollar-for-dollar reduction on their federal tax bill for eligible dependent care costs incurred during the year. It’s separate from its more well-known sibling, the child tax credit.

The credit amount is between 20% and 35% of eligible expenses, depending on your income level, but it maxes out at $3,000 for one dependent or $6,000 for two or more dependents.

For those with more than $43,000 in annual adjusted gross income, it’s 20%. The computation can be pretty complicated, so check out the IRS child and dependent care credit interactive tool to help determine which expenses you incur are eligible for the credit.

Here are a few considerations:

1. Beware of double dipping. Expenses you pay using dependent care FSA funds cannot be taken as a credit. This rule applies in most areas of tax: you can’t receive two tax benefits for the same expense. Because of the no-double-dipping rule, it can sometimes make more sense to forgo a dependent care FSA to maximize your tax credit. FSAFeds, a U.S. government program, provides a worksheet to compare the benefits of both tax incentives. Alternatively, consult a trusted financial advisor to help you determine the best approach for you

Example: Suppose you pay $6,000 for day care expenses for your 3-year-old child in a given year. You decide to contribute the maximum $5,000 to your DCFSA. By submitting claims for reimbursement from your DCFSA, you access that $5,000 tax-free. You might also feel tempted to claim the child and dependent care credit on your federal tax return for the same $5,000 of day care expenses, but the IRS does not allow you to claim the child and dependent care credit for the same expenses reimbursed through a DCFSA. Because you paid more than your $5,000 DCFSA contribution, the remaining $1,000 can be claimed against the child and dependent care tax credit, as long as you meet eligibility criteria.

2. Care costs that exceed dependent care FSA contributions may be creditable. Child care costs often exceed dependent care FSA limits. Eligible costs beyond what you contribute to a dependent care FSA can go toward the credit amount, up to the applicable limit. (See the Russell the Resident example below).

3. It’s a nonrefundable credit. Your credit amount can’t exceed your federal tax liability for the year. For example, if you run a clinic that’s just getting off the ground and therefore claim no income, you may not be able to receive a child and dependent care credit.

When to Leverage the Tax Credit vs. DCFSA

Here's an example to consider:

• Russell the resident works at a hospital in Las Vegas earning $80,000 annually.
• He shares a 10-month-old baby with his spouse, Rose, who earns $100,000 annually.
• Together, they spend $2,500 per month ($30,000 annually) on their baby’s day care located around the corner from the hospital.
• Russell contributes $5,000 for the year to a dependent care FSA offered by the hospital.

Of the $30,000 in eligible day care costs, $5,000 is covered by FSA contributions.

The remaining $25,000 can be used to claim the child and dependent care tax credit. Because their adjusted gross income is above $43,000, their tax credit is limited to 20% of eligible expenses, up to $3,000. 20% of $25,000 is $5,000, so Russell and Rose can claim a child and dependent care credit of $3,000.

How did Russell leverage the DCFSA and tax credit?

• Russell and Rose reduced their taxable income by $5,000 by Russell maxing out his dependent care FSA.
• Russell and Rose are also eligible for a $3,000 child and dependent care credit that reduces their federal tax bill.

Join the Discussion

How have you managed the increasing cost of child care?