I was told this is because the tax forms require us to input what the dependent care FSA money was spent on in 2020 and if it wasn’t spent, it is considered taxable income."
That used to be true - use it or lose it. However, now that so many employers allow you to carry over unspent amount into the first 2 1/2 months of the next year, things are different.
Furthermore, the IRS has passed updated regulations because of COVID-19 that permit employers to modify their plans for 2020 and 2021 to make it easier to carry over unspent amounts in 2020 into 2021. Please see this notice in the IRS newsroom.
Note that IRS Notice 2021-15 can be found here.
So two conclusions:
1. you are not taxed on the unspent amount until you have run out of time to spend it (according to your employer's FSA plan).
2. You need to go right now to the HR department to see how your company has modified the rules for dependent care FSAs in light of the IRS notices.
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