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Answered - 2023 VA Deduction for Child & Dependent Care Expenses Appears to Pull WRONG Number from Federal Form 2441 - Software Is Correct

Using desktop TT for 2023 with VA State filing, I pulled down my forms to review prior to filing.

 

In my review, and comparison to last year's taxes (prepared by a tax professional), I noticed that our deductions were remarkably different.  In looking into this year's VA state instructions for form 760, looking for deduction 101, it says:

"101 Child and Dependent Care Expenses Enter the amount on which the federal credit for child and dependent care is based. This is the amount on federal Form 2441 that is multiplied by the decimal amount - up to $3,000 for one dependent and $6,000 for two or more. DO NOT ENTER THE FEDERAL CREDIT AMOUNT." (Emphasis added by poster, source:  https://www.tax.virginia.gov/sites/default/files/vatax-pdf/2023-760-instructions.pdf)

 

However, in TT desktop it is actually entering the value of the federal credit amount.  Which as stated above is not right.  How does this get fixed?  This will be the difference between me paying the state and getting money back.

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BillM223
Employee Tax Expert

Answered - 2023 VA Deduction for Child & Dependent Care Expenses Appears to Pull WRONG Number from Federal Form 2441 - Software Is Correct

The VA instructions state, "This is the amount on federal Form 2441 that is multiplied by the decimal amount" (see your quote above). 

 

Line 27 on the 2441 is not the amount that is multiplied by the decimal amount; line 3 is. And where does line 31 come from? Line 31. I will admit that the calculation wanders all over the place, but in my "simple" case, line 27 (your $6,000) is reduced by the FSA contribution amount to produce $1,000, which is lines 31 and 3.

 

"Enter the amount on which the federal credit for child and dependent care is based" - the federal credit is not based on the FSA amount - this must be removed to calculate the credit.

 

TurboTax appears to be making the correct calculation, unless you can provide a different interpretation of "Enter the amount on which the federal credit for child and dependent care is based" and "This is the amount on federal Form 2441 that is multiplied by the decimal amount".

 

Post Script: VA's purpose is to allow a deduction for which you did not already have a tax benefit. The $5,000 for the FSA must be removed, because you already had a tax benefit here - it was removed from Wages in Box 1 on the W-2 before the W-2 was even printed. It was only the $1,000 of the allowed $6,000 that did not receive a tax benefit. 

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BillM223
Employee Tax Expert

Answered - 2023 VA Deduction for Child & Dependent Care Expenses Appears to Pull WRONG Number from Federal Form 2441 - Software Is Correct

I just put together a quickie test in desktop, and the amount that printed as deduction 101 in VA was indeed the expenses on the federal return, not the credit. This was line 31 (and 29) on the 2441.

 

In your case, what was the total that you spent on childcare, what was the total of the two box 10 amounts on your W-2s (assuming that both spouses worked)? how many children are we talking about (one, or two or more)?

 

In the VA interview, the following screen appears:

 

The $1,000, which came from the federal return and which was allocated by default to Blank, is the amount that prints as adjustment 101 on the VA return.

 

Did you see such a screen, and what did it say? Did it have the federal credit there? Did you plug in your own value?

 

 

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Answered - 2023 VA Deduction for Child & Dependent Care Expenses Appears to Pull WRONG Number from Federal Form 2441 - Software Is Correct

Looking at how the forms are filled out: 

Ok - so I can see where an assumption may have been made to use line 31 from IRS Form 2441, but in cases where someone has an employer sponsored dependent care benefit (like a Dependent Care FSA) this wouldn't be an accurate assumption. 

 

Typically, line 31 will be the same as line 27 on IRS Form 2441, but in my case it's not. 

 

Line 27 is what the state form (VA 760) should use, but on the state form (Line 13) it reflects line 31 from IRS Form 2441.

 

In the software:

I did not plug in my own values.  I have two child dependents.  

 

If you are concerned about expenses for Child & Dependent Care, my expenses were entered as $14,486 - so way more than $5,000. (More on this number below.)

 

What is eligible should be $6,000 based on the instructions (two child dependents), but what defaults is $1,000 as you have shown in your post.  Total box 10 between W-2's is $5,000 (it is solely on mine - but it doesn't matter as long as we didn't BOTH have $5,000 which we didn't).   

 

Since you pointed this out, I CAN input $6,000 as I believe it should be and have it accept the number and correct it, but I wouldn't expect to have to delve this far into the calculations and I suspect the maximum return guarantee is not supported by having someone need to know to do this.  Shouldn't this be a software update?

 

 

 

BillM223
Employee Tax Expert

Answered - 2023 VA Deduction for Child & Dependent Care Expenses Appears to Pull WRONG Number from Federal Form 2441 - Software Is Correct

The VA instructions state, "This is the amount on federal Form 2441 that is multiplied by the decimal amount" (see your quote above). 

 

Line 27 on the 2441 is not the amount that is multiplied by the decimal amount; line 3 is. And where does line 31 come from? Line 31. I will admit that the calculation wanders all over the place, but in my "simple" case, line 27 (your $6,000) is reduced by the FSA contribution amount to produce $1,000, which is lines 31 and 3.

 

"Enter the amount on which the federal credit for child and dependent care is based" - the federal credit is not based on the FSA amount - this must be removed to calculate the credit.

 

TurboTax appears to be making the correct calculation, unless you can provide a different interpretation of "Enter the amount on which the federal credit for child and dependent care is based" and "This is the amount on federal Form 2441 that is multiplied by the decimal amount".

 

Post Script: VA's purpose is to allow a deduction for which you did not already have a tax benefit. The $5,000 for the FSA must be removed, because you already had a tax benefit here - it was removed from Wages in Box 1 on the W-2 before the W-2 was even printed. It was only the $1,000 of the allowed $6,000 that did not receive a tax benefit. 

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Answered - 2023 VA Deduction for Child & Dependent Care Expenses Appears to Pull WRONG Number from Federal Form 2441 - Software Is Correct

Thanks @BillM223 I've concluded the same shortly after my response post -- I just didn't have the time after that to post the correction.

 

What I missed was on Form 2441 is Line 3 and that Part III is only filled out because of the FSA.  When I entered the $6000 in TT Desktop it flagged it as an error and the explanation as to why it was an error helped me realize my mistake.  Of course, once I realized Line 3 says to enter Line 31, I was able to put all of it together as to the reasoning for the VA state using this value.  I had to do the thought experiment of well maybe I shouldn't elect for the FSA in 2025 to realize.

 

Thanks for taking me along the journey here - I appreciate your help @BillM223 ! 

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