Child tax credit and FSA dependent care accounts

[lywhite]

Hello,

In 2020 I did not put any money into a FSA dependent care account, but we did "opt in" to the child tax credit payments.

Next year, I am putting the maximum into a FSA dependent care account, and I'm wondering how that works together with the child tax credit payments (if they are extended)? I don't want to owe money back next tax season.

Thanks!

[xmasbaby0]

You are confusing the child tax credit with the child and dependent care credit.  Those are two different credits.  The child tax credit has no effect on your FSA spending.   However the amount you put into a FSA may affect your child and dependent care credit---so that is what you have to pay attention to.

[lywhite]

No, I wasn't confusing the two. I know they are different credits, and I do know that the amount you put into your FSA can affect your child and dependent care credit. I did not, know, however, if the child tax credit was affected by the amount that I put into my FSA account. That's what I was asking (which you did answer, but could have done so less condescendingly!).

[LJane29]

Hi 

So the best way to review these is to give you an example.  Also, the Child Tax Credit looks to be possibly extending (at least for 2022) but the expanded Depending Care Credit is not.

I'm going to give an example with 2 kids (both over the age of 5, income is under any phase out)

For Child Tax credit you would be eligible for $6000

For Dependent Care Credit let's say you did max FSA (expanded with the March 2021 tax law change) but also spent the max on care:

$8000 per child max = $16,000

less max FSA of $10,500

Amount available for figuring credit = $5,500

$5,500 x max credit allowed of 50% = $2,750

For 2021 both of these credits are fully refundable - so no matter what your tax liability is you would have $8,750 ($6,000 + $2,750) to not only offset your tax liability but to also get a refund.  So if you tax liability was $5,000 you would get an additional $3,750 in refund.

The amount you put in the FSA can only reduce the amount of Dependent Care that is eligible for the Dependent care credit (see the $5,500 above). 

The only time it can affect the Child Tax Credit is if you "over fund" your FSA (and some of it becomes taxable income).  That additional income could push you into a lower Child Tax Credit amount.

Le me know if that's not clear (sometimes things are clear in my head but I don't convey it well in writting).

Lisa

[JandKit]

Hi Lywhite,

The FSA is a before tax contribution and thus has a positive effect on your taxable income. The dollar amount placed in the account has a positive effect on your taxable income because it reduces the overall taxes you are required to pay. It will not negatively affect the child tax credit.

[lywhite]

Thank you! Could you please explain to me where the $10,500 max FSA contribution amount came from, though? I thought that the maximum amount for couples married filing jointly was $5,000 (even if you have multiple kids)? Thanks!

[LJane29]

Sure!  The American Rescue Plan Act (passed into law in March of 2021) expanded the amount from $5,000 to $10,500 for 2021.  Due to the late timing (2021 change happening after the start of the year) a lot of companies did not "adopt" the expanded amount.  So if you only had the $5,000 withheld then in my example that puts your eligible expense at $11,000 ($16,000 less the revised max FSA of $5,000) and would lead to a $5,500 credit (50% of the eligible expense).

So if your employer did not "catch up" on the expanded amount you only need to account for the amount they actually withheld (it will show up in box 10 of your W2).

[Opus 17]

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@lywhite wrote:

No, I wasn't confusing the two. I know they are different credits, and I do know that the amount you put into your FSA can affect your child and dependent care credit. I did not, know, however, if the child tax credit was affected by the amount that I put into my FSA account. That's what I was asking (which you did answer, but could have done so less condescendingly!).

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The child tax credit has nothing to do with child care expenses.  The child tax credit is $3000 or $3600 for each child dependent on you claim on your tax return.

The child and dependent care credit (and the ability to use an FSA to pay child care expenses) has different requirements:

1. The child must live in your home more than half the year.

2. You must pay for care so that you (and your spouse if married) can work, look for work, or attend school full time.

3. The child does not have to be your tax dependent, if you share custody. But they must live in your home more than half the year. In other words, it is possible to allow the non-custodial parent to claim the child for the tax credit while you claim the dependent care expense.

4. The credit may be reduced if you have an FSA, since you can't claim a credit for expenses you already paid with tax-free money.  

The child tax credit is simply a credit for claiming a child dependent.  The child care credit or FSA requires that you pay for care so you can work; the two tax items are otherwise completely separate.