Dependent Care FSA

[pinkelephants]

I will have over $20K of childcare expenses for my 2 children for 2025 and I'd like to take advantage of both the Dependent Care FSA & the CADC credit. My husband is currently unemployed, but he will be starting a business next year. However, I do not know if he will make any income in 2025.

What happens if I contribute the full $5K to my DC FSA and he ends up not making income in 2025? Is there any penalties or does that $5K I contributed simply become taxable income, in which case I'm no worse off than if I hadn't contributed to the DC FSA to begin with?

[Opus 17]

Correct.  Care is qualified for the credit if your spouse is looking for work, but the actually dollar amount allowed for the credit or FSA will be limited to the taxable income of the lower-earning spouse.  In case of self-employment, this means 92% of his net profit on schedule C.  If he doesn't have income, the FSA money that was excluded from your wages will be added back as taxable income, but there are no additional penalties.

Because the FSA saves more in taxes than the credit pays you, the FSA is a better choice even if you are not certain he will have income. 

[rjs]

You said "I'd like to take advantage of both the Dependent Care FSA & the CADC credit."

Be aware that the dependent care FSA reduces the amount of expenses that you can use for the child care credit, dollar for dollar. With 2 children, if you don't have an FSA, you can use a maximum of $6,000 of child care expenses for the credit. If you put $5,000 in an FSA and use it all for child care, the maximum amount of expenses that you can use for the credit is $1,000.

But the FSA is still a better deal, so you should put as much as you can into the FSA and just use the remaining amount for the credit.