If your employer offers a cafeteria plan (also called a flexible-spending or Section 125 plan), you may establish a tax-deductible account to pay for qualified dependent care expenses.
These tax-deductible accounts are called dependent care reimbursement accounts. You authorize your employer to make deductions from your pretax salary and deposit them into your reimbursement account. During the year, you use these funds to pay for dependent care expenses, up to a certain amount each year. (Many employers cap the annual limit at $5,000.)
Your contributions to a dependent care reimbursement account lower your taxable income. You also do not pay payroll taxes on this income. Your employer is also eligible to deduct its share of half the payroll taxes on contributions you make to the account.
For example, assume you fund a dependent care account with $5,000 and are in the 25% income tax bracket for 2008. Your potential income tax savings are $1,250. Plus, you save another $383 in payroll taxes for a combined tax savings of $1,633. Your employer is also able to deduct $383 from the amount of payroll taxes it owes.
In addition to offering dependent care reimbursement accounts, some employers offer paid assistance for adopting a child. The amount of employer-paid adoption expenses that you may exclude from your income is $11,650 for 2008. The 2008 income limit at which your ability to take a full $11,650 exclusion begins to phase out is $174,730.
There are also times when you may wish to take a leave of absence from work to care for a child or other dependent. The Family and Medical Leave Act requires employers to allow employees up to 12 weeks of leave in order to care for a new child. The child may be newborn, adopted or in a foster home.
Most employers offer some sort of dependent care benefit as a part of their overall employee benefits plans. For example, they may provide a day care center, hiring a child care service or operating the center itself. Finally, other employers offer flexible work arrangements that give parents more time to spend with their children or other dependents such as an elderly parent that may require daily care.