@Michael16 wrote:
Thanks. Was the full $5,000 contributed to the DCFSA not deducted from income for the year? $5000 was reported in box 10 of the W-2.
The DCFSA is a great deal, especially since it also protects us from employee FICA taxes. Given our income, it makes most sense to contribute to the DCFSA rather than elect the child and dependent care credit. I was a little surprised since the limit was temporarily raised in 2021 to $8,000 for one child, which allowed us to take advantage of the credit in addition to the DCFSA last tax season.
The credit and the FSA interact in the following way.
Your maximum expenses eligible for the credit are $3000 for the care of one child and $6000 for the care of two or more children. The maximum benefit under a cafeteria plan is $5000 (this could be a dependent care FSA or on-site care provided by the employer). The amount contributed to the FSA is excluded from your taxable wages including social security and medicare. (If you think your box 1, box 3 and box 5 wages include the FSA amount, you need to get a corrected W-2 from your employer.)
Then, the amount of the FSA is counted against your eligiblity for the credit. For example, if you paid $18,000 for one child and had a $2000 FSA, the remaining $1000 would be eligible for the credit. Or, if you had a $5000 FSA and paid for care for 2 children, there would be $1000 of expenses eligible for the credit ($6000 minus $5000).
However, having an FSA in excess of $3000 does not result in taxable income, it's not "excess" that's added back to your taxable income at all. You are allowed a $5000 FSA or a credit based on $3000 of expenses, they don't stack, but you aren't penalized for taking the full $5000 FSA. You will have a taxable event if you withdraw money from your FSA that is not used for qualified care. (The FSA plan is supposed to have procedures to prevent this.)
You are correct that for most taxpayers, the FSA is much more favorable, especially when paying for care for one child. The credit is only better at incomes less than about $35,000.
