Form 2441, Part III, Line 18

[dnschang]

Hi,

I am certain that the turbotax Form 2441 calculations are incorrect.

We are married filing jointly, with my earned income being $2,000 and my wife $60,000 (numbers are simplified for ease of calculation). We have one qualifying dependent so maximum we can claim is $3,000.

I received dependent care benefits of $5,000 from employer in the form of reimbursement voucher, reported on my W-2 box 10.

As I understand, the excess of $3,000 over my earned income is taxable (Form 2441, Part III, Line 26), and the $2,000 (Form 2441, Part III, Line 25) can be used for dependent care credit calculations, which results in $1,000 in Form 2441, Part II, Line 6.

The part which I believe turbotax (and some other software I tested, though with minimal customer support) incorrectly calculates is Form 2441, Part III, Line 18, where it somehow shows my earned income as $0 not $2,000. IRS instructions do mention "for purposes of lines 18 and 19, earned income doesn’t include any dependent care benefits shown on line 12," but that does not mean we subtract the $5,000 (or any amount) from my earned income of $2,000. The consequences of this incorrect calculation is that turbotax deems the entire $5,000 taxable benefits (Form 2441, Part III, Line 26), and my earned income of $2,000 will become the basis for dependent care credit calculations (Form 2441, Part II, Line 6). Although I would receive double the amount of dependent care credit this way, that additional $2,000 taxable income actually increases my final tax liability.

I hope there is somehow a way to fix this in turbotax online.

Thank you so much.

[RogerD1]

I worked up a mock return using the information you gave in your example.  Form 2441 ended up showing both the $60,000 wages and the $2,000 wages on line 18 and 19 in Part III.  It ended up with a $200 credit for the Child and Dependent Care credit and $3000 of taxable income from the employer dependent care benefits reported on line 1e of Form 1040.

I'll share the entries I put in for the Child and Dependent Care credit and you can check in they agree with those that you have:

• Let's get some details to help maximize your credit - none of these apply
• Summary of dependent care expenses - $5,000 care expenses for the dependent
• Your expenses for care providers - $5000
• Carryovers from prior year used in 2025 - $0
• Let us know about these uncommon situations - both marked No
• Congrats! You qualify for the credit.  Amount of $200 for the credit

If any of your information differs from what I entered for carryovers or the uncommon situations, that will change the outcome.

[dnschang]

Your result is exactly what I thought I would be getting. Unfortunately, I entered exactly as you did but still got the same incorrect result. I deleted my W-2 and 2441 and added them back again. Still doesn't work.

Any thoughts on why?

Thank you.

[RobertB4444]

Please describe the numbers on your W2 for me.  You should have $2000 in box 1 and 3 and 5.  You should have $5000 in box 10.  Is this correct?

[dnschang]

That is correct. The exact number for boxes 1/3/5 is $1817.65 if it matters. May or may not be relevant, but I did notice my earned income that populated into 2441 became $1899, which I also do not understand as I do not have other sources of earned income. This is evidenced by, if I remove my W-2, the program says I do not have earned income and thus do not qualify for the credit. So the extra $81 seems to be associated with the W-2 but makes no sense.

For your information, the turbotax AI/automated explanation popping up on the right says "With one qualifying person, the maximum expenses you can use is $3,000. You received $5,000 in Dependent Care Benefits from your employer, which reduces your eligible expenses to $0, but the IRS allows you to use the lesser of your earned income or $3,000 for the credit calculation. Since your earned income is $1,899, only that amount counts. Your credit rate is 20%, so your final credit is $380."

That italic part is what might be causing this, but your mock entry doesn't seem to be experiencing the same thing.

Thank you.

[RogerD1]

You may want to try deleting the form for the Child and Dependent Care credit and starting over to see if that gets the correct outcome on the form.  If you are using the desktop version of TurboTax, you can delete a form, by clicking on Forms in the blue banner on the right and then finding Form 2441 in the listing on the left side and clicking on that.  Once that form has appeared on the screen, click Delete Form to delete form then click Yes on the pop-up to confirm deletion.

If you are using TurboTax online, follow these steps:

1. Click on Tools on the left side menu, then click Tax tools right below that
2. Form the Tools Center pop-up window, select Delete a form
3. A list of the forms in your return will be on the screen.  Click the trashcan to the right of Form 2441 to start the deletion process, then click Yes to confirm deletion.

[dnschang]

Still does not work after deleting the forms. I'm using turbotax online. Would the desktop version be any different? I am more than willing to buy the desktop product if that means fixing the issue.

It's also intriguing that a competitor software produces the same exact problem, including the incorrect earned income number, which makes me wonder if something is off.

Not sure what to try next.

Thank you.

[DawnC]

Deleting form 2441 is a 2 step process, so make sure it is fully gone before going through the steps again - - How do I delete Form 2441 in TurboTax Online?    You have to remove the credit from the summary page first, and then delete the form.   If you delete the form without answering NO in the interview, the form doesn't really go away.  

[dnschang]

I figured out half the issue. It is related to my 1065 K-1 which has a loss of $4,919 reported on schedule E. If I remove the 1065 K-1, the dependent care credit Form 2441 calculates my earned income correctly as $1,818, which is my W-2 income, shown on Form 2441, Part III, Line 18. However, if I add my 1065 K-1, the program somehow calculates my earned income as $1,818 + $5,000 - $4,919 = $1,899 (Form 2441, Part II, Line 4), and for some reason Form 2441, Part III, Line 18 would show $0.

Any solutions to this?

[JamesG1]

Similar to @RogerD1 above, I compute a $200 credit for child and dependent care expenses in TurboTax Desktop Premier.  I included a 1065 K-1 and W-2 wage numbers similar to @RogerD1 above.

In my example, the 1065 K-1 loss does not affect line 18 earned income but that may be because the loss was credited to the other spouse.  The reason may be because of how the 1065 K-1 was entered on this end versus how the 1065 K-1 was entered at your end.

@dnschang 

[dnschang]

I don't know what to say but this actually worked. Attributing the K-1 to my spouse fixed the numbers for me, but I think as you said, it is a superficial fix because the loss is probably applied to my spouse's earned income instead, which is way over the dependent care benefit so the issue is masked.

The software has some real bugs with this. Ironically, when I attribute the K-1 to both of us, I received max credit of $3000 x 2 = $600, which makes absolutely no sense.

See the turbotax AI/automated explanation below for each option I select:

Me (correct designation, incorrect result):

"With one qualifying person, the maximum expenses you can use is $3,000. You received $5,000 in Dependent Care Benefits from your employer, which reduces your eligible expenses to $0, but the IRS allows you to use the lesser of your earned income or $3,000 for the credit calculation. Since your earned income is $1,899, only that amount counts. Your credit rate is 20%, so your final credit is $380."

Spouse (incorrect designation, correct result):

"With one qualifying child, the maximum expenses you can use for the credit is $3,000. Because you received $5,000 in pre-tax Dependent Care Benefits from your employer, your eligible expenses are reduced to $1,182. Your credit rate is 20%, so your credit is $236 ($1,182 × 20%)."

Both of us (incorrect designation, incorrect result):

"With one qualifying child, the maximum expenses you can use for the credit is $3,000. You received $5,000 in Dependent Care Benefits from your employer, so your eligible expenses are reduced to $3,000. Your credit rate is 20%, so your credit is $600."

Any advice on how to proceed? Is this something you can report higher up?

Thank you so much.

[RobertB4444]

Is the -$4919 amount reported on your 1065 K-1 in box 14 as well as box 1?  Because that would mean that the income is considered self-employment income and the partnership has listed you as an active participant in earning that income.  In which case your actual earned income for the year is -$3101 and you would not qualify for the child and dependent care credit.

If you are not an active participant in that partnership you should request a corrected 1065 K-1 that lists you as a passive individual instead and would keep you from having to pay self-employment tax on earnings from the partnership.  

[dnschang]

I think that's it.

Checking my records, for all the K-1s I have received, the income has always been listed under nonpassive income and the amount appears in both box 1 and 14. Almost all of them are at a small loss so self employment taxes didn't come into play. My earned income only decreased to this small amount for the past two years as I was paid on a fellowship, so it didn't matter before.

In this case, the software still thinks I qualify for the credit as initially calculated because now the $5,000 dependent care benefit is all taxable income and feeds into the earned income calculation. Is the software correct in doing so? Or as you said, my earned income should never include the $5,000 whether or not it's taxable?

On a separate note, is active/passive member designation based on actual participation and can be changed easily? I ask because I am technically a member-manager of the llc but have very limited participation.

Thank you so much again for walking me through this.

[AmyC]

If you didn't earn enough to support the exclusion the $5,000 can become taxable wages which counts toward your income for the calculations. 

As member-manager you are an active participant for SE tax but may participate at a passive level.

• Material Participation (The "Passive Loss" Rules): This determines if you can use losses to offset other income. If you spend less than 500 hours (or meet other specific tests) on the business, you are passive.
• Self-Employment Tax Rules: This is what dictates Box 14. If you are a Member-Manager, the IRS generally presumes you are a general partner for tax purposes. This means your share of the LLC's ordinary income is subject to Self-Employment tax, regardless of how many hours you worked.

To change things is not easy.

If you are listed as a Member-Manager in the LLC’s operating agreement, you are legally viewed as having the authority to bind the entity. To move that income from "Nonpassive" to "Passive" (and remove it from Box 14):

You would likely need to update the LLC's legal structure or your specific role to "Member" (excluding the "Manager" title).

Note: If you are reporting a loss, the IRS usually doesn't complain if you call it "passive," because passive losses are restricted and can't be used as easily. However, if you are trying to claim a credit (like the EIC) based on that income, they will look very closely at whether you actually earned it through "material participation."