My understanding of these flexible spending accounts is that you either "use it or lose it". So if you set aside a portion of your salary through your employer's FSA for dependent care expenses, and can't spend the money on qualified care during the year, then that money is lost.

You're in a tough situation. You seemed to have made the correct decision, since paying for your child's care through your FSA generally gives you a better tax break than the credit you could otherwise claim.

Here are some thoughts. If your child will be taking any classes, such as those offered by Gymboree, perhaps they will qualify.

Or if people will be helping care for your child, maybe they will be kind enough to let you submit their information to your employer. They will be taxed on the income reported, but you will be able to get back your money from your employer. And as long as you don't pay any one person more than $1,500 during the calendar year, you don't need to set yourself up as a household employer and worry about remitting social security and Medicare taxes on behalf of the caregiver. More info on being a household employer is available at: http://www.irs.gov/publications/p926.


Good luck with this one. It's a shame that you're being penalized for making a prudent tax decision.

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