I've done a lot of research on this. I am 100% convinced that Turbotax has a problem with form 2441 Child and Dependent Care Expenses when you have DC FSA carryover from 2020 to 2021 and don't have any 2021 Dependent Care Flexible Spending Account (DC FSA) contributions. It may relate to handling DC FSA carryover regardless of your DC FSA contributions for 2021. Here is what I have observed.
First, it seems like Taxbotax is using a non-zero/blank amount in Box 10 of your W2 to determine if they will walk you through a set of W2 pages to capture DC FSA benefit information (e.g., did employer provide onsite daycare, do you have a DC FSA, balance amount in your DC FSA at the end of 2021). Apparently, having an amount in Box 10 also triggers the creation of form 2441, and specifically Part III of the form so it can save the DC FSA balance information you entered on 2441 Line 14. If there is no amount in W2 Box 10 you are not walked through these pages and no 2441 form is created as part of this process.
Second, when you enter your dependent care expenses in the Deductions and Credits section, this is where Turbotax wants you to enter any DC FSA carryover you had from 2020 to 2021. Turbotax will only walk you through the screen to enter the carryover amount if you had an amount in your W2 Box 10 (or have 2441 Part III included in your return—I don’t know which). Like I stated above, I believe Turbotax creates Part III as part of the W2 entry process when there is a value in Box 10.
Third, if you fake out Turbotax by putting an amount in your W2 Box 10, enter your FSA information as part of the W2 process, and enter your DC FSA carryover amount when entering your dependent care expense, there is still an additional problem. Turbotax is not subtracting the carryover amount you entered in the Deductions and Credits section and stored in 2441 Line 13 from Box 2(c) on form 2441. This causes a number of fields on form 2441 to be incorrect. The 2441 instructions clearly state that the amount in 2441 Line 2(c) excludes any rollover amount in Line 31. The amount in 2441 Part III Line 31 is derived from what's in Line 13 via a complicated set of steps.
I've talked to Turbotax customer support a couple of times and they don't acknowledge the problem and won't take ownership for researching the problem.
Here is what I decided to do to get the correct Child and Dependent Care credit on my 2441 form, and therefore on 1040 Schedule 3 (line 15).
- I’m going to leave my W2 Box 10 blank. I don’t think the IRS will like the fact that I put $1 in it when the field is blank in the W2 information they receive from my employer. This my flag the return immediately.
- In the Dependent & Credits section of Turbotax, I’m going to enter all my dependent care expenses that I paid to providers in 2021 ($1,581 in my case).
- When I enter the dependent cares expense for my child, I’m going to reduce the amount I enter by my carryover amount ($,1581 - $779 in my case).
- Turbotax will then calculate the correct credit I’m entitled to on form 2441 Part I and II using my income and the depended care expenses I entered above. Part III of 2441 will not be generated. It’s like I didn’t have any DC FSA benefits (no form 2441 Part III).
- I’m hoping the IRS will accept and process my return this way. If they later send me a letter stating that I didn’t account for my DC FSA benefits via form 2441 Part III, I can send them the explanation (Turbotax issue). My return has the total expenses I paid providers and the correct qualified expenses (total expenses less carryover).
- I’ll be crossing my fingers.
One last comment in case TurboTax is listening. I believe they need to re-engineer this process. Entering/verifying information related to your DC FSA benefits in two different places is confusing (i.e., in the W2 section and the Child and Dependent Care Credit section). In the Child and Dependent Care Credit section they should ask if you have a DC FSA before/after you enter your dependent care expense information. If you do, they should walk you through an additional set of pages to validate your W2 Box 10 information, capture the additional DC FSA benefit information, and then complete form 2441 (Part I, II, and III, if required) at this point.
