Here is a complete description of the process, which should tell you how the FSA contributions get excluded.
First, if you have an FSA (Flexible Spending Account) for Child and Dependent Care Expenses, you will enter contributions made to the FSA through your employer in Box 10 of your W-2.
Second, go to Deductions & Credits->You and Your Family->Child and Dependent Care Credit and click on Start or Revisit.
- Answer “Yes” to having paid for child or dependent care in 2018.
- On the next screen, check off for whom the care was paid. Note that if you have not entered the dependent yet, then the name won’t show up here (so go back to My Info and enter the dependent first). Or you can click on Add Another Dependent which will take you back to the My Info section and then you’ll have to navigate your way back to this section.
- On the next screen, you will have a chance to add any care providers that you paid. Note that care provider names will be carried over from the previous year, so be sure to delete any care providers that you did not pay in 2018.
- On the next screen, pick a dependent and care provider and enter the amount of the expense. If you have more than one child for whom you paid care expenses, enter them both. Enter the full amount of the expenses without regard to the limitations.
- On the next screen, you will be asked about a couple of unusual situations.
- The next screen will tell you the size of the tax credit (NOTE: this is not the size of your entire tax break, because it does not include the tax avoided by making contributions to the FSA; this is just the Child and Dependent Care Credit itself).
If you want to know how the credit was calculated, click on “Why do I have a $XXX Child and Dependent Care Credit?”
In short, the tax credit calculation goes like this:
- You can receive a tax credit of 20% of child and dependent care expenses up to $3,000 for one dependent or up to $6,000 for two or more dependents.
- However, any dollars paid from a child and dependent care FSA do not count towards the expenses for the credit, and dollars are considered paid from the FSA first before any other dollars. This is why the FSA contributions must be entered on the W-2 in Box 10.
- Thus, if you have one dependent and contributed more than $3,000 to the FSA and spent more than $3,000, then there is no tax credit, because the entire eligible $3,000 came out of the FSA, which is already tax advantaged (it was removed from Wages in box 1 on your W-2 before it was printed).
- At the same time, if you have two or more dependents for whom you spent $6,000 or more and contributed the full $5,000 to the FSA (which is the maximum possible), then while the first $5,000 in expenses is deemed to have come from the FSA and is therefore not eligible to be applied to the tax credit calculation, the remaining $1,000 ($6,000 maximum for the credit’s expenses less the $5,000 from the FSA) is eligible to be applied to the tax credit expenses, which results in a Child and Dependent Care tax credit of $200 (20% of $1,000).
Expenses over and above the $3,000 or $6,000 (whichever applies) receive no tax advantage.
