DCFSA Taxable Income? Tax Law change from 2022 to 2023?

[jnmunsch]

Hello-

I used $1,800 from my 2022 DCFSA during the 2023 Grace Period. I also elected $5,000 for 2023 for my DCFSA from my employer and used all of it. Therefore, in 2023, I used $6,800 towards childcare from DCFSA funds. I know during COVID there were some exceptions to using more than $5,000 and the instructions for the form have changed for the current year where it appears that the excess is going to be counted as taxable income ($1,800). Here is my issue. I prepare my taxes with both TurboTax, HR Block, and on Paper by myself. I like to know where the numbers come from and see if there are an inconsistencies between the different methods. 

When I answer all of the questions related to DCFSA funds, HR block says "good news, $6,800 can be excluded". And no money is counted towards the dependent care credit.

When I answer all of the questions related to DCFSA funds, TurboTax counts $1,800 as taxable income and I get small dependent care credit back.

Which one is correct? What are the current laws regarding using more than $5k from your DCFSA when you use carry over money from the previous year during the grace period and utilize the maximum election for the current year? I have a feeling that HR block forgot to update their tax software, but it seems like such a huge oversight.

Thank you!

[AmyC]

We are! For 2023: Form 2441 does show the carryover of the funds and they are part of the calculation for determining the credit allowed.  See the flowchart of page 5 of Publication 503 for deductibility.

Pub 503 states:

The temporary special rules for dependent care flexible spending arrangements (FSAs) have expired. The temporary special rules under Section 214 of the Taxpayer Certainty and Disaster Relief Act of 2020 that allowed employers to amend their dependent care plan to carry forward unused amounts from 2020 and/or 2021 to be used in a subsequent year have expired. For 2023, you may only enter on Form 2441, line 13, amounts you carried over from 2022 and used in 2023 during the grace period. See the line 13 instructions for Form 2441. 

About Form 2441, Child and Dependent Care Expenses

The maximum contribution allowed for 2023 is $5,000.  Your $1,800 may need to be taxable to create the credit in dependent care. Without seeing your return and knowing a little more, that is my best guess.