Dependent Care Credit not considering Carryover

[myfriend09]

I carried over $829 in my dependent care FSA from 2020 to 2021 because my employer elected to allow for it under IRS rule. For 2021, I had $12 withheld and added to my dependent care FSA. So, $841 available for dependent care.

I paid $601 in 2021 for dependent care. Despite entering $601 for "Total dependent care expenses you paid," TurboTax somehow comes back with $829 in "Total Care Expenses" (the total I carried over from 2020).

For "Carryover used in 2021," I entered $601.

TurboTax is now calculating a $166 dependent care credit, which is 20% of the $829.

How is TurboTax coming up with the $829 when I have not entered it anywhere? Is it somehow from the 2020 return (which I filed using TurbTax)? Why is it using a carryover amount for the tax credit calculation and not the expenses paid??

The intent of the dependent care credit is to provide a credit for expenses paid that are in excess of what you use from a dependent care FSA (for which you already receive a tax benefit). TurboTax is giving me a credit on dollars I've already deducted for tax purposes. Is this a glitch? Have I answered something wrong?

TurboTax should be taking my total expenses paid ($601), subtracting the carryover ($829) and the current year withholdings ($12), and applying the 20% to anything remaining (less than $0 for me). If TurboTax was working remotely correctly, it would at least take $601 mins $12 and calculate the credit on that. But it's using carryover dollars as the basis??

[Cynthiad66]

Agree with your analysis of the situation.  Your Child care balance after applying the Carryover and contribution is $0.

Yes, The $829 was a carryover from 2020.  When you consistently use TurboTax, it accurately maintains carryovers for you.  That is one of the greatest features that TurboTax offers.  It monitors and carryover items appropriately for you.  

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@myfriend09

[myfriend09]

@Cynthiad66 Thanks for the reply. I cleared all history from my browser and still experiencing an issue.

Here's something else strange:

After realizing I had no EIN for one of the dependent care providers ($360), and therefore cannot include that portion on my return, I changed the amount from $601 to $241 for the response to "How much did you pay for [child's name]'s care in 2021?" When I click continue, it says the amount is $601...a difference of $360 (the amount I removed).

I also noticed this: the difference between the $829 carryover and $601 initial 2021 expenses entered is $228, and the difference between the $241 revised 2021 expenses and the $12  2021 withholding is $229. Are those differences the same number, just with rounding difference?

Either way you cut it, TT is not doing something right. 

[JillS56]

Let me make sure I am understanding everything correctly.   

Amount of 2020 to 2021 Carryover                                  $   829.00

Amount of 2021 FSA  Contribution                                   $     12.00

        Total FSA Contributions for 2021                               $  841.00

Eligible Day Care Expenses                                                -    241.00

         Amount Eligible to Carryover to 2022                     $   600,00

If you are using the TurboTax Desktop version, switch to Forms mode and look for Form 2441 in the list of Forms on the left-hand side of the screen.   On Form 2441 you should see:

• Part I, Box 1 should be filled out with the Day Care Provider's information and amount of Day Care expenses.

• Part II, Box 2 should contain information about the child the daycare expenses apply to.

• Part III, Box 12 - the amount of 2021 daycare expenses.
• Part III, Box 13 - the amount of carried over FSA funds from 2020 to 2021
• Part III, Box 14 - the amount of 2021 FSA funds to carry over to 2022
• Box III, Box 15 - should be Zero.

You should not be receiving a child-dependent care credit on your return.   As you stated in your question, the $360 is not eligible for any credit since you do not have an EIN for the daycare provider.

[myfriend09]

Hi @JillS56,

You captured my situation correctly. However, I do not have the desktop version of TT. I'm doing it online. 

I agree with your Form 2441 entries and agree I should not get a credit. 

I don't know what to do at this point. I guess I could enter nothing for dependent care expenses so that I do not incorrectly give myself the credit, but seems I still need to submit Form 2441 to document to the IRS what happened this year.

[myfriend09]

@JillS56 - Looking at Form 2441 again, I think the key is that my qualified expenses are $0 because I used pre-tax dollars to pay for the $241, therefore not "qualified." No matter what's entered for all the other lines on Form 2441, that should make my credit $0. (This is how TurboTax filled out my 2020 return as well. I had $546 of expenses all paid with pre-tax dependent care FSA so qualified expenses were $0.)

So, I tried to change the costs for my dependent to $0, but TurboTax still comes back with $241 somehow. 

If I remove my dependent's expenses altogether, then the provider expenses are deleted with it and I assume no Form 2441 would be generated.

[BillM223]

You are correct that there is an issue with TurboTax carrying over FSA funds (no, that's correct), and then applying those funds to calculate the Child and Dependent Care Credit (that's not correct). Unfortunately, since you are using the Online product, I don't have a workaround for you.

Since the IRS is awash in unprocessed paper returns and they really really really want you to e-file, give me a little while to think up of a workaround for the Online product that would let you e-file and minimize the damage.

@myfriend09

[myfriend09]

@BillM223 Thanks for the response. Any luck so far?

Also, wanted to ask a question about the desktop version of TT, which I've never used that before.

If I purchased the desktop version, is there a workaround for my situation? And what are the filing fees? Am I paying for the software PLUS a fee to file? Trying to decide if making that purchase is worth it.

Thanks.

[BillM223]

I could not find a workaround in the Online product, but yes, there is a workaround in the desktop software. Line 30 on the 2441 says to not included any amount from lines 24 and 25. These lines are the excludible and deductible benefits (the box 10 amount is the excludible one). Your FSA contributions were excludible in 2020 but got carried over instead. But these are still tax-advantaged dollars so should not be used for the credit in 2021. 

So remove from the entry on line 3 any amounts from the carryover. In my test case, it was 100% of the carryover, and it may be the same for you). This will cascade down through the page until none of the credit is generated by the 2020 carryover. This is your workaround.

As for the desktop software, you are paying for the software and the federal e-filing – for up to 5 people (yes, this is popular with people who do taxes for their family). The reason that the Champs and the employees here all use the desktop product is because you can see the forms at all times (since we have in essence already paid for the software). The same would be true for you.

I must confess that when you do overrides, often TurboTax will not let you e-file – I how no idea what it will do in this case. I have no way to test this.

The desktop software includes one state download, but e-filing the state is extra ($25 per state at the moment but subject to change). Take a look at https://turbotax.intuit.com/personal-taxes/compare/desktop/ for more information. 

@myfriend09

[myfriend09]

@BillM223 I downloaded the desktop version, but it will not allow a $0 entry as an override on line 3 and still allow me to e-file. I even tried to put in $1 to satisfy the e-filing requirement and the software wants to pull in the original $241 I had entered initially. Even if I clear out all fields, expenses, payees, delete the form, and start over, it still somehow brings in that $241 (just like the online version did as I described above).

I then searched for others asking questions about Form 2441 and ran across another thread that you replied to and it helped me FINALLY figure out the issue. I had to go back to the W-2 input form and change the amount of money leftover in my FSA. There was technically money still in it  but for Form 2441 to be filled out correctly I had to enter $0. That allowed me to report $241 in expenses paid to a provider and the software to correctly calculate $0 of qualified expenses. 

Now the remaining issue is with lines 12-15, which should in my situation should be as follows:
12  $12  DCB received in 2021 (from W-2, box 10)

13  $241 carried over from 2020 and used in 2021

14  ($12) amount from 12 and 13 carried over to 2022
15  $241 sum of 12-14

But if I do this, it changes my qualified expenses to the $241, incorrectly gives me a credit, AND changes line 26 to $241 thus taxing me on those dollars spent though I clearly spent on dependent care.

I also found that if I override line 16 to $241 then it takes away the credit and taxation of DCB. However, that override will not allow e-filing.

I think this whole situation is a combination of a bad tax form/instructions by the IRS and TT not handling it correctly (as evidenced by this thread).

Ultimately, I'm going to have to enter $0 for line 13 (which is not accurate) so no credit is generated and I'm not taxed for DCB. While the lines will not be 100% accurate, I'm not getting taxed more than I should and I'm not claiming a credit that I'm not entitled to. Hopefully, if the IRS audits me, they'll understand this as well.

[JillS56]

Sorry you had to go through all of this but I am glad you were able to make the adjustments to report it correctly and still be able to  e-file.