Bills have been introduced in the Senate and House of Representative to raise the limit on dependent care flexible spending accounts (FSAs) where dependent-care expenses (including child-care) are paid with pretax dollars. Unchanged since 1986, the current cap for qualifying expenses is set at $5000. Unfortunately, more than 20 years later with no change to the limit, this benefit has become significantly outdated.

Dependent Care Flexible Spending Accounts - What Are They?

A dependent care flexible spending Account (FSA) enables you to take pretax dollars and pay for dependent care while at the same time lowering your taxable income. You allot part of your before-tax dollars to help pay for your work-related dependent care costs for the year.

So what qualifies as valid dependent care costs?

Eligible dependent care expenses for flexible spending accounts are expenses that allow a couple, if married, to be employed. Dependents can include a child under the age of 13, or elderly parents or a spouse who may live with you but are incapable of taking care of themselves.

There is a bipartisan effort in both houses of Congress to raise the cap, but it is complicated by worries over the federal budget deficit.  The House proposal, co-sponsored by Rep. John Yarmuth (D-Ky) and Rep. Sam Johnson (R-Tex), would raise the limit to $7,500 from $5,000. A Senate bill co-sponsored by Sen. Blanche Lincoln (D-Ark.) and Sen. Olympia Snowe (R-Me.), would make it $7,500 for one dependent, and $10,000 for two or more dependents. Both bills suggest raising the cap as necessary to keep pace with inflation. However, opposition is expected because these changes would further cut into federal revenue at a time of spiraling deficits.

Everyone agrees the cap is outdated; advocates say prospects for an increase “are very positive.” Nevertheless, opposition is likely because of the potential impact on tax revenue at a time when federal budget deficits loom large.