How does unused dependent FSA funds affect taxes?

[Relyt460]

My dependent care FSA election for 2021 was $10,500. I only used $8,000. My employer allows a grace period through the end of 2022 to use the remaining 2021 funds.

When entering these numbers into TurboTax, it appears that I will be taxed on the $2500 carryover as income.

Is this correct?

[DaveF1006]

Yes, you will be taxed on the $2500 excess. Your $2500 unused funds will add to the $5000 FSA maximum limit in 2022.  This means that the maximum limit put into your Dependent Care FSA for 2022 will be $7500. $5000 plus your $2500 unused limit for this year.

[Opus 17]

No, you should not be taxed on the carry over.  However, I believe the question is in an unusual place.  When you first enter your W-2 with the FSA in box 10, Turbotax should ask "was this daycare provided on site by your employer" and it should also ask "did you forfeit or carry over any funds".  If you missed that question, try deleting the W-2 and entering it again.

[Relyt460]

Found it, thank you!

[DaveF1006]

@Relyt460 @Opus 17   After reviewing my original answer, Opus 17 is correct by stating the carryover is not taxable and his correct outline of steps to fix this is correct. I apologize for missing this when I worked it out in my sample program and I do appreciate Opus 17 input in this matter.

[SreeN]

I have incurred $5000 in childcare expenses but missed to file claim within deadline for 2022. I lost 5K and wondering about what the implications are in terms of taxes considering I lost 5K. I still haven't filed my 2022 taxes.

1. Do I get childcare tax credit in 2022?

2. Will $5000 be added back to my W2 income in 2022 or 2023? 

3. Do I have to pay taxes on $5000 in 2022? Do I need to file amendment?

Anything else I am missing.

[Opus 17]

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@SreeN wrote:

I have incurred $5000 in childcare expenses but missed to file claim within deadline for 2022. I lost 5K and wondering about what the implications are in terms of taxes considering I lost 5K. I still haven't filed my 2022 taxes.

1. Do I get childcare tax credit in 2022?

2. Will $5000 be added back to my W2 income in 2022 or 2023? 

3. Do I have to pay taxes on $5000 in 2022? Do I need to file amendment?

Anything else I am missing.

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If you left the money in the FSA unclaimed, you still need to run the dependent care interview.  One of the questions is "did you forfeit any funds" and you would report that you forfeit the $5000.  It is not added back as taxable income because it was forfeit and lost to you.  You don't pay tax on it (because it was subtracted from your taxable wages when it was set aside).  It's just forfeit--gone, lost.

Because you did not use the FSA, you will still qualify for the dependent care credit if you have eligible child care expenses.  The credit is between 20% and 35% of eligible costs up to $3000 for one child or $6000 for 2 or more children.  (Most people qualify for 20%.)   You need to complete the entire dependent care interview and make sure to indicate that you forfeited those funds.