Dependent care FSA and divorce

[honey42bee]

Hi

My wife and I are in the process of divorce and I am the one who is contributing the dependent care FSA for my son this year.

Question:

1. If we divorce this year, I could submit "life event" to my employer to stop the dependent care FSA. Will the balance which contributed return to me as taxable income?

2. If we do not settle this year and divorce in next year, likely we will file tax return as "married but file separately"  for this year and she will claim my son as dependent. Could I still reimburse dependent care FSA for my son this year? Or the money just lost for this year?

If I could, how to handle the section of dependent care FSA while I do not have dependent for tax return of this year.

thank you a lot for this

regards

[Opus 17]

You will have to ask your employer benefits administrator, but I believe that if you submit a life event, it will only stop future withdrawals from your paycheck. It will not refund to you money that is already accumulated in the account.

You could continue to withdraw that money to pay for the childcare expenses.  If you don’t claim a dependent on your tax return, the amounts you withdraw will be not qualified, and they will be added back to your taxable income. however, at least the daycare bills will have been paid, so it will be, as if you simply paid the bills with after-tax money as you would have without the FSA. If you leave the money in the account and forfeit it, it is not added back to your taxable income, would you still have to pay the daycare bill somehow.

If you are still legally married on December 31 and you file as married filing separately, and you do claim the child as a dependent, then up to $2500 of the FSA will be qualified expenses, and any amount over that will be added back to your taxable income. If you don’t claim the child as a dependent, monies withdrawn from the FSA will not be qualified, and they will be added back to your taxable income.  Again, however, this only applies the money that you withdraw from the FSA. If you leave money in the FSA, and it is forfeit, then it is not added back to your taxable income, but somebody still has to pay the daycare bill, one way or the other.

In short, it would seem most sensible to limit your FSA deposits, if you can, by using the life event to stop any future contributions. However, you can continue to submit reimbursement requests to empty out the account for day care expenses.  Any expenses that were reimbursed but are not considered qualified (either because you don’t claim a dependent or because you file MFS) will be added back to your taxable income, but there will be no penalty, so it will be as if you simply didn’t have the FSA in the first place and paid the expenses with regular after-tax money.  TurboTax will handle this situation automatically.

[honey42bee]

Thank you for your answer. As long as the FSA money will not be forfeited, I am ok.

regards