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Level 2

Solved

Child Care Tax Credit vs Child Care FSA for 2021

Forum|Forum|4 years ago
January 6, 2022
3 replies
0 views

I have 2 kids and can claim up to $16000 Child Care Tax Credit, with 50% tax return.

But I also contributed $5000 Child Care FSA. My company allows me to rollover all the $5000 to 2022.

If I reimburse $5000 of the day care fee, I would only be able to claim $11000 Child Care Tax Credit.

Question is, can I rollover the $5000 FSA and claim the full $16000 Child Care Tax Credit? Those $5000 will show up in my 2021 W2 form I believe since I see it in my 2020 W2.

Will TurboTax handle this or I have to reimburse those $5000 and then claim up to $11000 child care credit?

Best answer by Opus 17

@Opus 17

Does the following mean the 2020 FSA can roll over with 2021 and reimburse up to $10500 expense?

“On March 11, 2021, The American Rescue Plan Act of 2021 (ARPA) was signed into law by President Biden. ARPA allows employers to increase the annual limit on contributions to dependent care FSAs up to $10,500 for the 2021 plan year only"

And currently the 2022 Dependent Care FSA limit remains $5000 which explains why I can't take advantage of $10000 FSA for 2022 expense?

I'll watch for any policy change before the deadline of my 2021 expense reimbursement.

And at last, if I end up with claiming $16000 child care tax credit and request all the $10000 FSA to 2022 expense, are you sure the worst situation is just pushing $5000 to taxable income, rather than losing that $5000?

Thanks for all you information.

@JamesFan

The emergency action gave employers the option of allowing employees already enrolled in an FSA to increase their contributions to $10,500 for 2021 only. Either your employer did not offer this option, or you did not take it when offered. In any case, the credit is worth more for 2021 as long as your income is less than $165,000.

For 2022, the tax laws revert back to the laws that were in place for 2020, unless Congress passes a new modification. Under the 2020/2022 rules, the maximum exclusion is $5000. Even if you had contributed $10,500 and managed to carry it all forward, you could only exclude $5000 from your income and the other $5500 would be added back to your taxable income on your 2022 tax return.

BillM223

Level 15

The intention of the Dependent Care FSA is to collect tax-advantaged dollars to pay for child and dependent care.

The purpose of the change in the Taxpayer Certainty and Disaster Relief Act of 2020 was to help taxpayers who suddenly did not have access to child care because of COVID to carry over unpayable amounts in your FSA from 2020 to 2021. This was updated to also allow similar carry over from 2021 to 2022.

It was not the purpose of the Act to allow you to move contributions around (that you have already spent) to maximize your Dependent Care Credit..

So, have you already spent the $5,000 from the FSA on dependent care in 2021? Then I think you ought to report it that way. This is what would be in your employer's FSA records and the care provider's records, right?

It's true that you report the contributions to the FSA (the amount in box 10 in the W-2) on line 12 of the 2441, and then on line 14, you subtract the amount carried over to next year back out so that you end up on lines 14-26 with all zeroes (which lets you apply all of the $16,000 to the Dependent Care Credit according to the form), but I don't know if this would survive the audit when the auditor notices that you had already spent the $5,000 on dependent care and then decided not to report it that way.

To me this is an unknown situation created by many law changes within a short timeframe, creating unforeseen situations which the IRS perhaps has not addressed. So I am not advising you to do it, but if you do, document everything and go into it with open eyes in case of an audit.

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BillM223

Level 15

I have looked at Notice 2021-15 and Notice 2021-26 which both address issues related to changes in the dependent care FSA programs (also the changes apply to health care FSAs, but this does not apply to your question).

In both notices, the consistent reference to amounts to be carried over is to "unused amounts", that is, amounts that you or your employer contributed to your dependent care FSA but which you did not spend on dependent care in 2021.

But if I understand your situation correctly, you have already spent the $5,000 out of your FSA in 2021 on dependent care, so this amount is not an "unused amount".

Thus, my opinion is that any amounts that you actually paid in 2021 could not be considered for carryover to 2022.

@JamesFan

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Opus 17

Level 15

If you did not request reimbursement from the FSA custodian and the full $5000 is still in your account:

If I worked through form 2441 correctly, then you can indeed leave the money to be carried over to use during the 2022 grace period, and you can apply your care costs toward the credit, up to $8000 of costs for one child and $16,000 of costs for 2 children. However, make sure you don't also have an FSA for 2022 (because you would exceed the allowable amount) and make sure you can use up that $5000 within the grace period.

If you already requested reimbursement from your expenses:

There is no legal way to put the money back in the FSA. If your plan allows this, they are breaking the law. You would apply the first $5000 of costs toward the FSA, and could still claim a further $3000 (one child) or $11,000 (two or more children) toward the credit.

JamesFanAuthor

Level 2

Actually I spent more than $16000 in daycare in 2021 but haven't requested any reimbursement of my 2021 $5000 FSA yet.

And I also pre-elected another $5000 FSA for 2022 which will roll up to $10000 FSA which I plan to use in 2022.

Are you sure I "would exceed the allowable amount" if I use all the $10000 to reimburse 2022 expense?

I talked with our HR department and the answer I got is I have $10000 to spend if I don't reimburse my 2021 expense.

Opus 17

Level 15

@JamesFan wrote:

Actually I spent more than $16000 in daycare in 2021 but haven't requested any reimbursement of my 2021 $5000 FSA yet.

And I also pre-elected another $5000 FSA for 2022 which will roll up to $10000 FSA which I plan to use in 2022.

Are you sure I "would exceed the allowable amount" if I use all the $10000 to reimburse 2022 expense?

I talked with our HR department and the answer I got is I have $10000 to spend if I don't reimburse my 2021 expense.

Under current law, the maximum allowable FSA reverts to $5000 for 2022. You would certainly have $10,000 in your account to spend. But when you report on your 2022 tax return that you spent $5000 in current benefits and $5000 in carryover, the overall $5000 limit will be applied, and the other $5000 will be added back to your taxable income. There is no additional penalty in this case, but you don't get a $10,000 tax break, just the $5000 allowed by law.

I don't know what's in the long-delayed "build back better" but it might include another temporary increase of the FSA limits on the basis of the continued "emergency", in which case things might change (if it passes). As of now, what I wrote above is what will happen under the current tax laws.