Dependent care benefits on Form 2441 are different from W2

[ccdtzccdtz]

Here is my situation:

I contributed $5000 to my employer sponsored Dependent Care FSA and got full reimbursement for Year 2022. The original plan to file tax return jointly but now we decided to file separately, and my son will be claimed as dependent by my wife. As a result, I won't have any dependent on my return so technically I shouldn't contribute anything to the DCFSA for 2022.

I see turbotax uses Form 2441 to "correct" the situation if the software identify that I am not eligible to contribute to DCFSA. The thing is on Form 2441, Part III Dependent Care Benefits, Line 12, now it shows $2500 but my W-2 shows the tax benefit I received is $5000. How should I correct this line to the right value?

Other relevant info: Both my wife and I have earned income and we have a son we used to claim as dependent in our previous tax return when we filed jointly.

[BillM223]

Yes, you are limited to a $2,500 FSA contribution (box 10 on your W-2) because you are filing Married separate.

Is it possible that on your 2441, line 26, that there is a $2,500 which also appears as income on line 1e on your 1040?

[ccdtzccdtz]

Yes, there is.

But my issue is I think it should be 5000 (both in 2441 and 1040) as it was 5000 on my W-2. 

[ShirlynW]

Yes, you contributed $5000 and it is reflected on your W-2. @ BillM223 explained, since you are married filing separately, the amount you are allowed to  contribute is limited $2500. The other $2500 will be added back to your taxable income and taxes withheld.

For more information, there is a flowchart on page 5 of IRS Pub. 503  you can follow to understand why you were unable to use the credit.

[ccdtzccdtz]

Hi I fully understand I can't use the credit. But I think my main concern is since I don't claim my son as my dependent, am I even allowed to contribute $2500 to DCFSA in the first place? 

[BillM223]

It appears to me that in your case you may be able to claim your child for purposes of the dependent care FSA. Please see the main section "Who Is a Qualifying Person?" on page 3 in Pub 503. Then click on the link "Child of divorced or separated parents or parents living apart." It starts "Even if you can't claim your child as a dependent, he or she is treated as your qualifying person if". Let us know if this applies to you.

Although this Publication is generally aimed at earning the credit, I believe many of the rules apply to the FSA as well. 

[ccdtzccdtz]

Thanks for the reply. 

I don't think that clause applies to us. We are not divorced nor legally separated. We decide to file return separately merely for the purpose of tax.

I am actually fine with putting all the $5000 tax advantage (pre-tax) back to my 1040. The issue is I couldn't find out how to change TurboTax to reflect that. Right now based on my 1040 and 2441, turbotax is assuming I will still have $2500 tax benefit and only add $2500 back to my 1040.

[VolvoGirl]

I don't know about Form 2441 and the Dependent Care Credit,  but here are some things to know about filing separately.......

Unless you have a specific reason to file separate returns,

It is usually better to file Joint. Joint has the lowest tax rates and the highest Standard Deduction. And if you are in a Community Property state MFS gets tricky to figure out. Here's some things to consider about filing separately……

In the first place you each have to file a separate return, so that's two returns. And if you are using the Online version that means using 2 accounts and paying the fees twice.

Many people think they come out better when filing Married Filing Separate but they are probably doing it wrong. If one person itemizes deductions then the other one must itemize too, even if it's less than the standard deduction, even if it is ZERO!

And there are several credits you can't take when filing separately, like the

EITC Earned Income Tax Credit

Child Care Credit

Educational Deductions and Credits

And contributions to IRA and ROTH IRA are limited when you file MFS.

Also if you file Married Filing Separately up to 85`% of your Social Security becomes taxable right away even with zero other income.

See …….
https://ttlc.intuit.com/community/married/help/is-it-better-for-a-married-couple-to-file-jointly-or-...

[ccdtzccdtz]

Thanks for the info. We are fully aware of all the pros and cons.

[DMarkM1 · Accepted solution]

Yes, there is no mechanism using form 2441 to completely account for your scenario.  Bottom line the $5000 should be taxable income and is not since you are not eligible due to not claiming a dependent. 

Leave your entries as you have them with $2500 showing on line 1e as taxable dependent care benefits. 

Next in the "Wages and Income" section scroll down to "Less Common Income" and select "Miscellaneous" and then "Other Reportable Income."  Answer "Yes" and for description enter "Excess DCFSA" and enter $2500 as the amount. 

This will put the income on schedule 1, line 8 and flow to form 1040, line 8 as other income.

[ccdtzccdtz]

Thanks this makes sense!