"We only have one income and AGI is too much so we do not qualify for child and dependent care credit," - to be more accurate, there is no AGI limit on the credit, but if your spouse does not work and is not disabled or a full-time student, then you two don't qualify for it, no matter what your AGI is.
"so Turbotax kicks me out of the interview as also not full time student or disabled and does not allow me to enter expenses." Yes, if TurboTax realizes that you do not qualify, it terminates the Child and Dependent Care Credit interview. There is no point in asking for your expenses, because the amount of the credit is based on your qualified expenses, and by definition, you don't have any.
Remember, as noted above, this credit is specifically to enable both spouses to work, unless one is disabled or a full-time student.
"We were under the impression that FSA fund were pre-tax and only need to have qualified expenses for the funds to pay out, which preschool tuition is a qualified expense." - Yes, FSA contributions are normally pre-tax, when you have entered qualified expenses, but since you can't enter any qualified expenses (because of the spouse not working), the box 10 amount is added back to income.
It is added back to income because it was removed from Wages in box 1 before your W-2 was printed.
"Why can’t the qualified expense be offset by the FSA funding similar to a Medical FSA account?" - Because the definition of what is a qualified expenses is different between the two.
"And why is it not asking me about the carryover FSA funds from 2019, which is on Form 2441? Wouldn’t those be taxable too?" - You are not asked about these funds because they are not relevant to your 2020 Child and Dependent Care credit. But they aren't taxed in 2020 (like they would have been in 2019) because you didn't receive the income in 2020...they just disappear.
As you have now surmised, until your spouse either starts to work or is disabled or becomes a full-time student, there is no point in having a dependent care FSA. It just makes you think that you're getting a tax break when you can't. Better to have your employer include the box 10 amount in Wages in box 1...you'll still pay tax on it, but at least you get to keep the money.
@nitadragoo
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