Dependent Care FSA makes me ineligible for dependent care credit? Box 10 of W2?

[brts145]

My wife and I both worked full time in 2022 and had our first child. We paid a total of $9000 in daycare costs and funded a dependent care FSA with $5000 pre-tax. This amount is reported in box 10 of my W2 (as I believe it should be). When I enter the expenses for daycare as well as both of our W2's in TurboTax I'm told that I'm ineligible for the dependent care credit. My understanding is that we should be eligible for the dependent care credit based on our AGI ($170k) at a reduced rate for the amount over the FSA (i.e. $9000-5000=$4000).

I just spent several hours on the phone with TurboTax help at different levels and was told that the $5000 entered in box 10 is only for benefits paid by the IRS. I see why they say this from the IRS definition. However, I paid this amount via pre-tax deductions over the course of the year.  M employer is a very large one and I see posts on the internet about box 10 being the correct spot for this. I don't know where to go from here. 

EDIT: We have plenty of tax liability so it's not an issue with the credit being non-refundable.

[KrisD15]

You can only claim up to $3,000 expenses for one child for the credit.

This credit is non-refundable, so if you don't have a tax liability, you won't be eligible for the credit. 

Box 10 is the correct box to be entering the Dependent Care Benefits.

IF YOU HAVE A TAX LIABILTY, the credit will be a percentage of the 3,000 you can claim for one child (the lesser of $3,000 OR $9,000-$5,000=$4,000) so most probably $600 credit. 

To check, when you have finished entering all your tax information, look at line 10 on Form 2441. and line 18 on your 1040. 

This might make things more clear, you may not have any tax for the credit to be applied to. 

Instructions for Form 2441

[brts145]

@KrisD15 I have plenty of tax liability (>$20k) so the non-refundable nature of the credit is not an issue. Line 18 of the 1040 has no value in it. I've tried deleting the form 2441and clearing the taxes and starting over. I'm not going to pay for this service just to be able to check if it did the job correctly.

[SharonD007]

Line 18 on your 1040 is the result of line 16 which is the tax on your taxable income and line 17 which is any additional taxes that you owe.  If line 18 of your 1040 has no value in it, that means you have no tax liability.  You indicated that your tax liability is over $20,000 but it is not showing up on your form.  Please review your entries because an entry may have been deleted since your tax liability is not showing up on line 18.

[brts145]

@SharonD007 I'm anonymizing some numbers but my line 16 is over $20000 and Line 18 is the same

[brts145]

I suspect that Turbotax is not correctly classifying the box 10 on my W2 as dependant care FSA money. After entering the W2 the following are asked:

1. Did EMPLOYER provide on-site childcare? (We're asking becuase we need a little more info about he benefits reported in box 10 of your W2).
   1. Answer: No
2. Did PERSON have a flexible spending account to pay for child or dependent care? 
   1. Answer: Yes
   2. If you had any money left in your account at the end of the year enter the amount here.
      1. Answer: 0 (I used all the money to pay for daycare).

This is the line of questioning that should show that the $5000 is for an FSA but clearly that's not the case. 

[CatinaT1]

You will not qualify for the credit if you had pre-tax money in your FSA for Dependent Care.

Since you had money withheld pre-tax, you can't also take the credit.  You received tax benefit already by having it withheld pre-tax. You can't withhold pre-tax money and also take the credit, that would be getting a double tax break. 

The only way to have the pre-tax money withheld and take the credit is if you have more than one child. The credit limits you to $3,000 of qualified expenses for one child or $6,000 for two or more children.   If you had 2 or more children you would still have $1,000 to apply to the credit that hasn't received any tax benefit. 

If you have one child, having the money withheld pre-tax is your best option because you are actually getting $5,000 pre-tax instead of only getting the credit on $3,000 otherwise. 

[brts145]

@CatinaT1 I can't use the same pre-tax money for the credit but I paid ~$9k and $5k of that was pre-tax. The remaining ~$4K is eligible.

Sources:

https://smartasset.com/taxes/dependent-care-fsa-vs-dependent-care-tax-credit 

https://dpath.com/dependent-care-fsa-vs-dependent-care-tax-credit/ 

https://www.irs.gov/pub/irs-pdf/i2441.pdf 

[CatinaT1 · Accepted solution]

The limits for the Dependent Care Credit have changed from 2021 to 2022.

Please refer to IRS Pub 503, page 12, Dollar Limits. You can not use both an FSA and the Dependent Care Credit except in the situation mentioned above with two or more children.

[Seriously4]

We are in the same boat.  Did you ever get a solution to this?

Thank You

[KrisD15 · Accepted solution]

If you have one qualifying child, your limit is 3,000. 

If you have two or more, the limit is 6,000. 

Take the limit that applies to you and subtract the amount of the Dependent Care FSA amount listed in Box 10 of your W-2. 

If there is any limit left, you can use that amount to justify a credit. 

In other words, if you have one qualifying child, and 3,000 or more Dependent Care FSA, you are not eligible for a credit. 

If you have two or more qualifying children, and 6,000 or more Dependent Care FSA, you are not eligible for a credit. 

As CatinaT1 pointed out, the credit is less generous for Tax Year 2022 than it was for Tax Year 2021. 

[rautenbk]

This is the helpful answer right here. After watching a few YouTube videos, this is the answer that made sense of why we did not qualify.  With one child we did 5k in FSA so we are ineligible. 

That being said, I really wish they would increase this amount drastically. We paid 20k in daycare expenses and that is one of the cheapest around at a YMCA!  No one should have to pay this just to work and universal daycare needs to happen.

[brts145]

I marked the best answer. I will note that I had to talk to at least 5 turbotax helpers on the phone before finding the answer. It really should tell you why you're not eligible in turbotax

[sarawgodwin]

Hi, we have the exact same issue.  I understand that the maximum benefit is $3,000 per child and it's nonrefundable (we also have a $20k+ liability).  However, the FSA is payment before taxes, so shouldn't it really only be a deduction of whatever taxes we didn't pay upfront from the $3,000?

For example:

$3,000 credit

- taxes saved by using FSA = $5,000 * effective tax rate (25%?) = $1,250

= available credit of $1,750

The reason I'm asking is because we paid all of this money upfront.  My employer didn't provide any support in addition. 

Thanks in advance!

[CatinaT1]

The money you put into your FSA is pre-tax. If you put $5000 into your FSA and only have one child, you cannot take the Dependent Care Credit based on the Credit being limited to $3000 of expenses.

You are actually getting a better tax benefit by using the FSA than you would get by using the Dependent Care Credit.

For example, with one child, if you did not have an FSA and paid care expenses with taxed money, your credit would be limited to $3000 of expenses, even if you paid $5000 over the course of the year. The maximum tax credit for the lowest wage earners is 35%. So their tax credit would be worth $1050.

You likely have income greater than what falls into the 35% range for the credit so if you have income over $43,000, your maximum Dependent Care Credit would be only $600.

You are saving more by having an FSA and having $5000 of your income untaxed.